Macroeconomics: The Day Ahead for 21 July

The much anticipated ECB meeting will be front and centre, on what will be a busy day for central bank policy meetings, with the expected no change decision from BoJ and Bank Indonesia to digest, while South Africa’s SARB is expected to hike by a further 50 bps to 5.25% and Turkey’s TCMB to hold at 14.0%. The data schedule has Japanese and South Korea Trade, UK PSNB Budget data and France’s Business Confidence surveys to digest, while the US looks to weekly jobless claims and the Philly Fed Manufacturing survey. On the earnings front, Freeport-McMoRan (particularly due to its Oil & Gas subsidiary) will be in focus, along with AT&T, American Airlines, Dow, Seagate and Tenet Healthcare. A busy day for govt bond auctions has medium-dated and inflation linked OAT sales in France; Spanish 3, 5 & 10-yr, Canada 3-yr and US 10-yr TIPS. The Nordstream 1 gas pipeline has re-opened after a 10-day maintenance closure, and is operating at the 40% capacity level seen before the maintenance shutdown, which will come as some relief, but does not change the fact that Europe remains mired in an energy crisis. Italy would appear to be headed for Autumn elections, after 5*, The League and Forza Italia abstained in the Senate confidence vote yesterday, leaving the country back in an all too familiar limbo, and it will be interesting to see what polls show in coming days, with the PD and Fratelli d’Italia (Brothers of Italy) likely to benefit in theory.

** Eurozone – ECB council meeting **

The ECB is expected to stick to its pre-announced initial 25 bps rate hike (on all rates), despite a good deal of speculation that it might opt for 50 bps, but with Rehn reaffirming the already signalled 25 bps in July and a 50 bps move in September last Friday, this looks unlikely. The bigger immediate policy and credibility challenge for the ECB is to deliver on its anti-fragmentation tool, given the political crisis in Italy. What markets want to know about are: a) size – unlimited? b) what are the triggers for activation, and when? c) what are the conditionalities, e.g. in terms of fiscal policy requirements and targets; d) what form of ‘sterilization’ might be deployed to neutralize the impact on the ECB’s balance sheet? e) Will this be limited to govt bonds, or also include private sector debt, and will there be limits on the maturities of what might be purchased? All the anecdotal evidence from “sources” suggests that the ECB council is not agreed on any of the above points, with the hawks objecting in principle to setting numeric targets for spreads. There has also been some talk about trade-offs to agreeing to the mechanism in return for a more aggressive rate path, which to be frank would be the sort of stupid compromise that prompts a major policy error, and/or something that markets view either as ‘unworkable, or a ‘red rag to a bull’ to test the ECB’s resolve. It is certainly safe to say that the ECB cannot afford any slip ups in its communication.  It will also reiterate its long held line on the Euro that it has no target for the currency, but is always sensitive to any sharp or disorderly moves, above all in terms of their inflation implications.