An interview by ECB President Lagarde with Bloomberg TV grabs most headlines this morning. Her main message is that the next policy meeting (July 22) will be an important one including some interesting variations and changes. The sudden hyping of a normally dull summer meeting comes after the ECB last week completed its strategic review sooner than expected. They swapped the close to, but below 2% inflation target for a hard 2% one while allowing for temporary deviations. Lagarde added that this new inflation target might take a little longer to reach and stressed the acceptance and tolerance of temporary higher inflation. The new inflation target calls for new wordings around forward guidance on both interest rates and asset purchases, something the ECB will update next week. Apart from the semantics, ECB Lagarde indicated additional clarity on the post-PEPP period. The ECB’s current €1.85tn Pandemic Emergency Purchase Programme runs at least until March 2022. Since March, the weekly pace stands at €15/20bn. We argued before that around that timing, the ECB could temporary raise asset purchases under the regular APP (currently €20bn/month) in order to smoothen the eventual exit process. Lagarde hinted in that direction by talking about a “transition into a new format”. By tackling the asset purchases issue already in July, the ECB avoids an unwarranted build-up in tapering expectations: “We need to be very flexible and not start creating the anticipation that the exit is in the next few weeks, months”. Besides clearing the air on future policy (= removing uncertainty), the central bank will simultaneously extend the time frame for which ultra-easy monetary policy conditions will remain in place. By doing so, she breaks ranks with the current views inside the Fed (tapering discussion ongoing) and BoE (net asset buying to end by the end of the year).
Today’s eco calendar isn’t really enticing though the US Treasury starts its mid-month refinancing operation with 3-yr and 10-yr Note auctions. The empty calendar and last week’s setback in US yields suggests that Friday correction higher could be extended in a daily perspective. US yields added 1.9 bps (2-yr) to 6.7 bps (10-yr), but remain significantly lower on a weekly basis. ECB’s Lagarde interview could still be interpreted as dovish, though we’ve already had a setback in (EU) real yields as well last week. The single currency or core bonds don’t react in tomorrow’s Asian dealings. Asian equity markets follow the end of last week’s bounce in Europe and in the US. Other items to watch this week are US CPI inflation numbers (tomorrow) and retail sales (Friday), the start of Q2 earnings season, the US 30-yr bond auction, Fed Powell’s semi-annual testimony in US Congress and UK inflation/employment figures.
Bulgarian parliamentary elections delivered another inconclusive outcome. Former PM Borissov’s Gerb party won about 24% with almost 90% of the votes counted, followed by 23.5% for the anti-establishment group ITN. The Socialists secured 13.7% of the votes. It was the second ballot in just a few months’ time after a better-than-expected result for ITN prevented Borissov from a fourth term in April as all other parties refused to work with him. Bulgarian president Radev will give the winner of the election a first chance to forge a coalition before passing the baton to the runner-up. If that fails too, a third candidate is chosen by the president for a final try before new elections are called.
In the wake of the G7 early June, the G20 over the weekend agreed to set a minimum tax of 15% for corporates with a revenue of more than $890 million. They also decided to redirect some of the taxes in a way that multinationals with a turnover of more than $23.8 bn pay to countries where the (often digital) products and services are effectively sold. The new system is expected to take effect in 2023 and has been agreed to by 132 countries. Because of the tax deal and under intense pressure from the US, the EU is backing down on its own proposals for a digital levy. The bloc was due unveil proposals this week but has pushed that date back to July 20.