Central bank heads gather in Sintra

OVERNIGHT

Asian equity markets are mixed this morning ahead of the ECB forum in Sintra, Portugal (see below). Japan’s Nikkei posted a first rise in five days. Chinese stocks, however, were weighed down by reports that the US is considering further restrictions on AI chip exports to China. On the data front, Australia’s CPI inflation in May fell more than forecast from 6.8% to 5.6% (consensus: 6.1%). Also, data earlier showed German confidence dipping for the first time this year, while French consumer confidence improved.

THE DAY AHEAD

Following last week’s decision by the Bank of England to raise interest rates by 50 basis points to 5%, both its Chief Economist Huw Pill and Governor Andrew Bailey will speak at the ECB’s annual forum on central banking in Sintra. Pill will appear on a panel called “Lessons from recent experiences in macroeconomic forecasting” from 11:30BST. The main focus, however, will be Governor Bailey’s appearance on a panel with his counterparts from the US Federal Reserve, the ECB and the Bank of Japan from 14:30BST as they will doubtless discuss challenges for monetary policy in the current high-inflation environment. 

Unlike his peers at the Fed and the ECB, Governor Bailey has mostly refrained from providing explicit policy guidance. However, it is notable that the BoE has not pushed back against current market expectations for significantly further policy tightening in the way that it did late last year. Market participants will also be watching comments from the other central bank heads, including Fed Chair Powell, particularly whether he adds anything to recent indications that US interest rate rises could resume as soon as next month. 

The data focus resides outside of the UK today. Ahead of Friday’s Eurozone June flash CPI inflation estimate, Italy will be the first to release its inflation data for the month. Markets expect Italy’s EU-harmonised CPI inflation rate to fall to 6.8% from 8.0% in May. Spanish and German data will also be released tomorrow, including German regional CPI reports starting with North Rhine Westphalia data early tomorrow morning. Overall, we look for evidence that Eurozone headline CPI will fall to 5.5% in June from 6.1%, but for core CPI to tick back up to 5.5% from 5.3%. The inflation data is likely to maintain pressure on the ECB to hike again in July, despite recent survey evidence that economic growth is slowing. In the US, advance goods trade data for May will be released with the deficit forecast to narrow. 

MARKETS

US Treasury bond yields rose, which also pulled UK gilt yields higher, and the dollar fluctuated after strong data yesterday including consumer confidence and new home sales. The pound and the euro are slightly lower versus the greenback overnight. The Australia dollar weakened after the surprisingly soft inflation print.