Market movers today
In Scandi, today’s Norges Banks monetary policy meeting is not expected to bring new signals, see preview. It is one of the ‘small meetings’ and we expect Norges Bank to repeat the message from March of a forthcoming hike in September, see Scandi section next page.
Main event on the global front is the Euro flash inflation for April. We expect it to remain at the 1.3% level from March and we project core inflation will decline back to 0.9%, due to Easter base effects from 2017 becoming a drag on services prices. A temporary increase in headline inflat ion in coming months is likely because of energy price inflat ion, although we expect the underlying price pressure remains subdued going forward.
Also keep an eye on any news from the US-China trade negotiations taking place Thursday and Friday in Beijing. Any failure to reach some agreement could lead to a re-escalat ion of the trade conflict , see also Flash Comment: Trump holding fire as negotiations with China begin, 25 April 2018.
We also get UK PMI services for April, which may be decisive for Bank of England’s rate decision next week. It fell sharply to 51.7 in March, which was much more than suggested by other confidence indicators. We est imate a rebound to 53 in April.
US ISM non-manufacturing for April may fall further as an increasing amount of data points to some softening in demand growth – not least retail sales and durable goods orders.
Selected market news
As expected, the Fed maintained the target range at 1.50-1.75% at its May meeting, which ended yesterday. As it was one of the smaller meet ings, there was only the statement to look for new signals. Usually it does not change much from meet ing to meeting, which was also the case this t ime, but we still believe there was a couple of important changes. Firstly, the Fed now says that inflat ion is running near the ‘symmetric’ 2% inflation target meaning that it will allow inflation to move slightly above 2% (as it projected back in March). Secondly, it no longer says that it is monitoring inflation closely. In our view, despite the market reaction, we think it was slightly hawkish increasing the probability of three additional hikes this year.
US 2-year yields fell 3bp after statement and US stocks saw a small lift . However, US stocks retreated again into the close finishing down close to 1%. EUR/USD is broadly unchanged.
Markets now await the US employment report tomorrow and the results of the US-China trade negot iat ions also planned to finish tomorrow.
ECB’s Governing Council member Jens Weidman (hawk) said yesterday that market expectat ions of a first rate hike in mid-2019 is ‘not wholly unrealistic’.
