The Global Markets Weekly – 6/8/18

Posted June 11, 2018 by rvillareal

Fed Presses Ahead on Rate Hikes, ECB Taper Debate

It’s a busy week for central banks, with the Fed, ECB, and BOJ set to update policy communiques in a three day stretch from Wednesday to Friday. The U.S.-North Korea summit starting the 12^th will get plenty of attention, as will ongoing trade-related headlines and the contentious G-7 meeting this weekend.

A hike out of the Federal Reserve is a done deal given progress on domestic mandates. Nudges to Fed forecasts are likely to be modest for growth (higher), inflation (higher in 2018), and unemployment (lower), all in a direction that should add marginal upward pressure on the famed “dot plot”. Markets are pricing in one-to-two moves next year after a total of three to four in 2018, with DE seeing a better case for upside risks to that path.

While on balance set to have some hawkish tilts, there will be a little something for everyone. Reductions to the full-employment unemployment rate would help to offset more hawkish interpretations, and a number of Fed officials aren’t yet sold on the permanence of the inflation acceleration—admittedly driven in large part by base effects and energy prices—and some will beat the drum on yield curve flattening. Flattening is normal during a tightening cycle, but inflation breakevens are also lower than they were at the last two meetings, and financial conditions on balance tighter. Pockets of slower consumer credit growth have appeared, but banks generally remain upbeat about the lending environment. A resolute Fed normalization path in line with the current dot plot would still be good bit above market pricing, and more in line with DE’s expectations.

For the ECB, the question is whether Draghi et al choose to announce how to taper QE currently set to run through September, though a halving to 15B EUR per month for the final three months of the year has been widely seen as most likely. Italy has obviously thrown some uncertainty into the mix, but comments last week by the ECB’s Praet suggest debating that announcement will happen at this week’s meeting. A signal is likely, but perhaps not a decision until July. Italy is set to pressure the EU for looser budgetary constraints and a more growth-oriented approach ahead. Richer nations (mainly in the north) like Germany remain unconvinced, arguing that Italy needs to make more reforms before getting more help.  While further structural reforms are clearly needed in Rome, reforms are also needed in Brussels, such as closer banking union, some mutualization of debts, and fiscal flexibility. Key players Germany and France aren’t yet on the same page here, with a key EU summit in a few weeks.

Coming Week’s Key Indicators and Events

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