ECB Spurs Tightening Speculation

Weekly Report - 23/07/2017

Draghi Comments Send Euro Surging Higher Against Peers


While major central banks stood firm in the camp of prolonging accommodation during last week’s monetary policy decisions, the brightening outlook for growth and inflation has helped stoke prospects for gradual tightening and asset purchase tapering if conditions evolve positively.

Last Week

Policy decisions from the European Central Bank and Bank of Japan dominated the news flow last week despite no major changes.  The ECB left rates on hold, with remarks from President Mario Draghi stoking expectations of a more hawkish bias during the second half of the year.  The ECB will discuss asset purchases in the fall according to Draghi, with the potential for monetary tightening pushing the Euro to its highest point against the dollar in two years.  Nevertheless, headline inflation slowing to 1.30% alongside 1.10% annualized core inflation could change the outlook.

The Bank of Japan also kept policy unchanged, but responded with a revised inflation and GDP outlook.  Although the timeline for reaching the 2.00% inflation target has been extended, growth expectations were revised higher, suggesting an acceleration in economic activity is right around the corner.  In other news, Chinese growth managed to top estimates, rising 6.90% through the end of the second quarter helped by stronger traction in retail sales and industrial production.  However, there are concerns that this growth could give way to weakness during the second half of the year amid tighter lending conditions.  Rounding out the week, UK inflation managed to pull back moderately, helping ease concerns about inflation eroding household purchasing power.


The Week Ahead

At the top of the list of upcoming events is the US FOMC decision on Wednesday.  No change to interest rates sitting at 1.25% is anticipated, however, the Federal Reserve statement will be carefully monitored for any hints of further tightening or plans to reduce the size of the balance sheet.  Later in the week, the advance reading of second quarter GDP will be released, with expectations for growth to accelerate to 2.60%.  The UK will also be announcing second quarter GDP, with forecasts currently calling for a 0.30% quarterly increase while the annualized rate of change slows to 1.70%.  Canada will be rounding out the GDP reports with its May figures projected to come in at 0.20% growth.

Switching gears, Japan is set to chronicle the latest inflation and spending data.  Although household spending is expected to pop back into positive territory on an annualized basis, the monthly figure is likely to contract.  However, inflation is projected to remain on hold at 0.40% for both the core and headline figure as the jobless rate ticks modestly lower to 3.00%.  To round out the week, Australia will reveal second quarter inflation, with prices set to increase 0.50% for the three months ended in June and 2.10% on a year over year basis.


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