ECB Decision Due
Expectations are building that today’s ECB press conference could see the central bank turn significantly more dovish., with euro negative consequences. Wednesday’s series of worrisome Eurozone data prints would certainly seem to warrant a rhetorical shift. It has also not gone unnoticed that President Draghi endorsed the concept of a “growth compact” in parliamentary testimony last week for the first time. Investors have also remarked on the meeting’s location – in Barcelona for a change – in the expectation that this will somehow concentrate minds on the gravity of the situation facing the periphery, thus provoking a more dovish outcome. These observations are not without merit, but market speculation of a possible rate cut – either to the deposit rate or to the refi rate itself – does seem to be wide of the mark. Our European economics team think it is unlikely that any rate adjustments will be made, and economists surveyed by Bloomberg are unanimous in their expectation that the refi rate will remain at 1%. However, we also note that collective bargaining negotiations over unionized pay are still ongoing in Germany, and these could ultimately yield wage increases of well above the prevailing inflation rate. Awareness of this on the Governing Council could help push the rhetoric needle out of the “deeply dovish” zone, and back towards “merely dovish”. Given that a rate adjustment is so unlikely investors will be particularly alert for any hint of an upcoming policy response, whether that would come via a rate adjustment or by means of further 3y LTROs. Before the ECB meeting, the focus will temporarily come to rest on Spain where an auction of bonos is scheduled. Our rates strategists note that this auction coincides with heavy Spanish redemptions and coupon payments, freeing up plenty cash that could be ploughed back in to help absorb today’s supply. In the US, the ADP estimate of private sector payrolls disappointed at only +119k (cons. +170k). USDJPY dropped 20 pips on that. Our US economists note though that ADP has been an unreliable indicator of the official change in private payrolls as reported by the Bureau of Labour Statistics (BLS). They have also noticed that, for April data in particular over the past two years, ADP has significantly underestimated the official BLS reading. So, our economists stick to their BLS nonfarm payrolls forecast of +180k (cons. +167k). After three weeks of higher initial jobless claims, Thursday’s update will be even more closely watched than usual – although the ECB press conference which begins at the same time will provide some distraction.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank