Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
It’s a big day for the markets, with the latest US inflation figures and the European Central Bank releasing its latest monetary policy decision, and giving its view on the eurozone recovery.
Inflation is the issue of the moment, and economists predict a surge in May due to increased US consumer spending, fiscal support from stimulus packages, and the supply bottlenecks that are weighing on companies as the economy recovers.
The US CPI is forecast to rise to a 13-year high of 4.7% from a year earlier, up from 4.2% in April – which was already the fastest rise since 2008.
Jim Reid of Deutsche Bank is certainly excited, telling clients:
Welcome to the day with the most eagerly anticipated data point in recent memory.
If CPI jumps sharply, it will reignite concerns that sticky inflationary pressures are building, forcing central banks to end the money-printing stimulus programmes that have driven the recovery, and pushed up asset prices.
But the other side of the argument is that the rise in inflation will be transitory, and will fade once the impact of the pandemic is behind us.
Today’s figure won’t end the argument, but it will probably stir it up.
Reid adds:
I suspect that neither side will admit defeat if the number goes against them as it’s likely too early to see a definitive trend. There will still be large anomalies all over the place. Nevertheless, so far I would say that the inflationists have overwhelmingly won round one of this bout but that the Fed put up a confident defence in round 2 to draw level. Round 3 starts today.
Economists will be looking at core inflation closely too. This measure, which strips out volatile items such as food and energy, hit 3% in April, and is forecast to rise towards 3.5% for May.
That would be the highest annual reading for core inflation in 28 years, CNBC points out.
CNBC
(@CNBC)Hot inflation became scorching in May and is expected to hit a 28-year high https://t.co/5hhpKyBdgk
Jens Nordvig
(@jnordvig)US Core CPI spiked to 3.0% you last month, and consensus is for a 3.5% yoy reading Thursday. But the debate about transitory or not will not be settled any time soon. The debate will go on.
And twitter is not a bad place to follow how the views are evolving.
The ECB’s governing council will also have inflation on its mind today, after eurozone CPI jumped over its target last month to 2%.
Hawkish policymakers have been pressing their colleagues to prepare to scale back its huge €1.85tn bond-buying programme (PEPP), which is buying up government bonds to keep borrowing costs low across the eurozone.
The ECB is due to release new economic forecasts, which should be more optimistic than than the previous set three months ago. The eurozone economic outlook seems brighter, as Covid-19 vaccination programmes spur the recovery and restrictions are eased.
It may be too early to slow PEPP (which is due to run until March 2022), but not too early to talk about it…
Patrick Barbe, head of European investment grade fixed income at Neuberger Berman, believes the ECB will wait until after the summer to cut its PEPP purchases.
There are still major uncertainties. One is the threat of the new Covid-19 strains and resulting economic impacts. Also, financial conditions have been tighter since the March meeting, and the ECB does not want to give a hawkish signal that could further tighten them. Additionally, although service sectors are reopening, the ECB would like to confirm that an activity rebound recreates jobs.
Finally, the pace of a recovery in inflation rates and the ability of the ECB to support a gradual and sustained rise in inflation rates is uncertain.
So he expects the ECB will announce more flexibility linked to financial conditions, and wait until the autumn to see how events play out.
So it could be a volatile day – which would make a change, given the markets have been rather subdued of late.
Michael Brown
(@MrMBrown)Futures largely unchanged this morning, while Treasuries find slight demand, and G10 FX treads water in familiar ranges.
Looking ahead, a busy day awaits, including the ECB decision, US CPI & US jobless claims.
European stock markets are on track to open a little higher, ahead of the double whammy of data at lunchtime.
IGSquawk
(@IGSquawk)European Opening Calls:#FTSE 7101 +0.28%#DAX 15606 +0.16%#CAC 6577 +0.20%#AEX 723 +0.08%#MIB 25746 +0.02%#IBEX 9208 +0.57%#OMX 2276 +0.15%#STOXX 4105 +0.20%#IGOpeningCall
The agenda
- 9.30am BST: Office for National Statistics’ weekly indicators of economic activity
- 12.45pm BST: European Central Bank decision on monetary policy
- 1.30pm BST: ECB press conference
- 1.30pm BST: US inflation report for May
- 1.30pm BST: US weekly jobless figures