Harkster ECB Preview - June 05
Today’s focus... market expects a hawkish cut.
Consensus: Committed to a June cut but data dependent going forward.
We've arrived at the first cut as the momentum has already come out of the cutting cycle! Hawkish board members as well as the data have forced the mkt to reassess the ability of the ECB to cut "fast". We're now looking at 2 maybe 3 cuts having been closer to 7 at the turn of the year.
May's inflation reading in the euro area, showed a rise to 2.6% and magnified underlying pressures and stronger-than-expected service price increases.
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Factors contributing to sustained inflation
#1. Stronger-than-expected euro-zone economic output
#2. Record-low unemployment
#3. Rapid wage growth
#4. Resilience in peripheral economies such as Greece.
#5. Robust consumer demand is enabling firms to pass higher costs to consumers, resulting in sticky services inflation.
#6. Disinflation momentum slowing (a global issue)
#7. Uptick in German leading sentiment indicators from Q1 nadirs
As a result, there is a clear focus in the literature for a noncommitted / hawkish communication from Lagarde. Mirroring the recent message of board members such as Schanbel, Holzmann and others
What's in the price...
Traders have reduced bets on easing, with July now off the table and only a 60% chance of a cut in September.
Rate differentials point to higher EURUSD and the expectations trade has been a hawkish cut from Lagarde. If long be careful, your sitting with the crowd.
ING's Scenario Analysis
Nordea: Only small changes expected to the ECB's June projections
Further reading of note, curated from Harkster.com (your research inbox)
Nordea - Euro-area flash inflation: Questioning ECB cuts after June
Bloomberg - ECB’s Inflation Challenge Looks More and More Like the Fed’s
Bloomberg - ECB Rate-Cut Expectations Start to Unravel Before First Move
Econostream - ECB Insight: Insiders See Likelihood of July Cut as Low, but Don’t Expect It to Be Excluded
Econostream - ECB Insight: A Rate Cut Everyone Can Support, and Then a Clean Slate
Livesquawk - ECB Likely To Cut Rates This Week; Next Steps Unclear
Saxo Markets - What an ECB rate cut may mean for equity markets
Raiffeisen - ECB Watch: The path beyond June
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