SocGen: It’s A “Witches’ Brew Of Politics And Monetary Policy”

Did anyone tell you that today is “Super Thursday”?

That’s sarcasm. It’s probably fair to say that no matter what happens with Draghi, Comey, and the UK election, today won’t live up to the hype (maybe I just jinxed it), but be that as it May (get it?), everyone’s on edge.

There were some notables overnight, and as we wrote this morning, the news out of the BoJ needs to be considered in the context of what the ECB is doing (or at least thinking of doing).

As for Britain, that particular “super Thursday” event likely won’t have any impact until Friday. And then there’s Comey, which is pretty much a wildcard because while we have the prepared testimony, we don’t have anything else including whatever Donald Trump will invariably tweet.

Here to try and make sense of it all is SocGen’s Kit Juckes…

Via SocGen

A witches’ brew of politics and monetary policy

The ECB is edging towards the exit from extraordinary policies, the BOJ is recalibrating its exit communication strategy, whatever that means, the US is preparing for the start of the Comey show, and the UK is going to the polls, or the dogs, or both. In the meantime, markets are pretty quiet, with bond yields globally recovering a bit, and equity market edging higher with the exception of the Nikkei.

It goes without saying that recalibrating a communication strategy in advance of a decision to change policy, isn’t the same as actually doing something. The BOJ meets next week and faces a -0.8% y/y GDP deflator in Q1, while the most recent core CPI reading is at zero. BOJ policy is geared to fighting deflation and as other central banks revise inflation forecasts lower, the idea that they could declare victory soon seems strange. For now, US yields – especially TIPS, are holding the lower end of rangers rather than breaking free, and we expect USD/JPY and EUR/JPY to do the same, before moving higher.

We’re told that the ECB is going to revise its inflation projections lower (to 1.5% from 1.7% for 2019) and declare that the overall risk assessment is broadly balanced for the first time since Mario Draghi took office. Since our own inflation forecast for 2019 is at 1.5%, maybe it’s unfair to suggest the downward revision of the ECB’s forecast (and the way it seems to have leaked into the press) is intended to help offset the shift in the risk assessment. But it probably is far to suggest that the ECB wants to avoid a major market reaction to the move, and the press conference may also be used to that effect. The ECB won’t want the Euro to strengthen too much before they start open discussions about the timing of the next reduction in the pace of bond purchases. That said, you can’t always have what you want and while they may succeed in holding the Euro down today, it’s likely to be a fair bit higher by the end of the summer.

The UK polls close at 10pm and we’ll get first indications of the outcome thereafter, with a result sometime tomorrow morning. I don’t imagine we will see much action in sterling markets today, as everyone waits. But the OECD did publish its latest UK Economic Outlook yesterday, and it made sorry reading. Since they paid for my University education (many years ago) I’ve always had a soft spot for the OECD. They’re pessimistic on growth, looking for GDP to grow by 1% next year and they’re pessimistic on trade in particular. They don’t quite go so far as to make Brian Hilliard look optimistic, but they are definitely singing from the same song sheet. The economic effect of leaving the EU may not be savage in the short run but will be more corrosive in the long run, than the decision to leave the ERM in 1992.

Political distractions hinder fiscal progress in the US and political uncertainty plays its part in keeping bond yields where they are. An optimistic view of the ex-Director of the FBI’s testimony is that is could help reduce the uncertainty, one way or the other. More realistically, maybe once it’s out of the way the underlying performance of the economy, which is dull rather than weak, will drive markets. If that’s the case, we’d look for slightly higher yields, but not a big enough move to de-rail global yield-hunters or to prevent the real focus being on the ECB rather than the Fed