Draghi’s velvet tongue to be put to the test
Today’s European Central Bank rate decision was pre-empted by a conference in Sintra, Portugal (quite a few weeks ago now) where the head of the bank, Mario Draghi, prepped markets for a major reassessment of monetary policy.
At present, the bank make scheduled purchases of Eurozone assets under their PSPP programme (equivalent to quantitative easing from the Bank of England or Federal Reserve) but a surging growth picture with falling unemployment and stabilising levels of inflation on the continent is putting pressure Draghi and his board to begin turning off the liquidity hose and allowing the economy to heal more naturally.
The euro’s performance over the past month is evidence enough that the market’s confident in a positive and upbeat press conference today, adding just over 2.5% against the US dollar across June and close to 10% year-to-date.
What markets will be looking out for specifically is any mention of a timeline or condition at which the ECB will begin slowing, winding down or even ending their asset purchases. The so-called taper of purchases would likely begin in early 2018, where the ECB could trim purchases by as much as €20 billion per calendar month on the condition that the economic outlook stays rosy and deflationary risk recedes further into the background.
Any indications that this taper could happen before the end of this year, as soon as October perhaps, should prove positive for the euro, but today Draghi will likely talk down the prospect of a shock change in policy in order to contain market volatility and reduce the risk of the disinflation that a strong domestic currency brings. The rate decision is due today at 1245BST, with the presser following at 1330BST.
Faltering inflation is unlikely to prop up retail sales today
Following on from Tuesday’s sluggish inflation data from the UK, the ONS will release June retail sales numbers at 930 BST this morning. Despite May’s figures being woeful at best (monthly sales ex-fuel dropped 1.6%), June is unlikely to see a sharp recovery: median expectations are for a rise of just 0.5%.
While inflation slowed on Tuesday to 2.6%, the bulk of the slowdown in prices came solely from fuel and energy; meaning that imported t-shirt on the high street or the European fruit and veg in the supermarket will still be rising in price due to the weak pound.
As such, today’s ex-fuel retail sales figures do hold an element of downside risk, which would prove negative for the pound. Nonetheless, favourable weather always has a habit of lightening our wallets, so we may see evidence of that in today’s release also.
Bank of Japan stall on inflation deadline
Stalling on targets or deadlines isn’t new for the Bank of Japan. This marks the sixth time Bank of Japan head Kuroda has had to push back their projection of hitting their 2% inflation target and, as a result, they’ve maintained their commitment to control and distort the country’s market interest rates to incentivise inflationary pressure.
The yen’s not reacted too much overnight, but USD/JPY still sits close to the middle of the range it’s sat in since the beginning of the year. Clearly, the Bank of Japan will need to reach deeper into their pockets to find a further solution.