Good morning and welcome to our continuous overview of the global economy, financial markets, eurozone and business.
This is an important day for the markets as the latest US inflation data and the European Central Bank released their latest monetary policy decision and expressed their views on the eurozone recovery.
Inflation is a hot issue, with economists forecasting a spike in May due to increased consumer spending in the US, fiscal support from stimulus packages and supply bottlenecks that are weighing on companies as the economy recovers.
The US CPI is projected to rise to a 13-year high of 4.7% from a year ago, up from 4.2% in April, already the fastest growing since 2008.
Jim Reed of german bank of course excited, telling clients:
Welcome to the day with the most anticipated data of late.
If the CPI rises sharply, it will reignite fears of rising tough inflationary pressures forcing central banks to end the money-printing stimulus programs that spurred the recovery and raised asset prices.
But the other side of the argument is that the rise in inflation will be temporary and will stop when the effects of the pandemic are over.
Today’s figure will not end the controversy, but it will likely set off a wave.
I suspect neither side will admit defeat if the numbers go against them, as it is probably too early to see the definitive trend.… There will be big anomalies all over the place. However, so far I would say that inflationists have won overwhelmingly in the first round of this fight, but that the Fed defended itself confidently in the second round to equalize. Round 3 starts today.
Economists will also keep a close eye on core inflation. The measure, which excludes volatile commodities such as food and energy, reached 3% in April and is forecast to rise to 3.5% in May.
CNBC notes that this will be the highest annual core inflation rate in 28 years.
The ECB’s governing council will also be thinking about inflation today after the eurozone consumer price index surpassed its target last month to 2%.
The hawkish politicians are pushing their peers to prepare to cut back on a massive 1.85 trillion euro bond buying program (PEPP), which buys government bonds to lower the cost of borrowing in the eurozone.
The ECB is to publish new economic forecasts, which should be more optimistic than the previous one made three months ago. The outlook for the eurozone economy looks brighter as Covid-19 vaccination programs accelerate recovery and restrictions are lifted.
It may be too early to slow down PEPP (which should run until March 2022), but it is not too early to talk about it …
Patrick Barb, Head of European Investment Grade Fixed Income Unit at Neuberger Berman, believes that the ECB will wait until the end of the summer to reduce purchases of PEPP.
There are still serious doubts. One of them is the threat of new strains of Covid-19 and the associated economic consequences. In addition, financial conditions have tightened since the March meeting, and the ECB does not want to give a hawkish signal that could tighten them even more. In addition, while the service sectors are reopening, the ECB would like to reaffirm that the recovery in activity is creating new jobs.
Finally, the pace of inflation recovery and the ECB’s ability to maintain a gradual and sustained rise in inflation remain uncertain.
Therefore, he expects the ECB to announce more flexibility related to financial conditions and wait until fall to see how things develop.
So this could be an unstable day that will make a difference, given that the markets have been pretty calm lately.
European equities are on track to open slightly higher ahead of a double hit of data at lunchtime.
- 9.30 BST: Office for National Statistics weekly economic activity indicators.
- 12:45 pm BST: European Central Bank Monetary Policy Decision
- 13.30 BST: ECB press conference
- 13.30 BST: US inflation report for May
- 13.30 BST: US unemployment data for the week.