Steen Jakobsen
The Bank of Japan has abandoned quantitative easing and the European Central Bank may taper its bond-buying programme, so what is the role of central banks in 2017, asks Saxo Bank’s chief economist Steen Jakobsen.
Article / 10 June 2016 at 5:02 GMT

3 Numbers: Bundesbank summit speakers to warn of ECB policy flaws

Blogger / MoreLiver's Daily
  • German inflation has been stuck at zero, with no impact from higher oil prices yet
  • The Bundesbank summit will bring subdued criticism of ECB monetary largesse
  • US consumer sentiment has lost some gains but it's high ahead of the Fed
  • The Fed may prepare investors for a rate hike at its June press conference
By Juhani Huopainen

Germany May Consumer price index (0600 GMT). The consensus forecast does not expect any changes to preliminary inflation data that has already been released. The flash harmonized index of consumer prices was unchanged from year ago, while the consumer price index showed an increase of 0.3%.

Higher crude oil prices are widely expected to bring some inflation pressure to bear in Germany. But that remains to be seen.

German inflation
 Chart source: Saxo Bank

Bundesbank’s Spring Conference. The German central bank’s spring conference this year runs under the title “monetary, financial and fiscal stability”. Germany’s opposition to the European Central Bank’s ever-easing monetary policy is well known by now. The commercial banks are annoyed about low interest rates, which make it hard for them to earn an interest margin.

 While Bundesbank president Jens Weidmann may not criticize ECB monetary policy in the way that finance minister Wolfgang Schauble has (above right), he is likely to give a solemn reminder of the risks involved in its largesse. Photo: iStock

The central bank and the government are worried about the risk of bubbles in financial and real estate markets. Most of all, the government is worried that so-called structural reforms, wage adjustments and fiscal budget balancing have been delayed because deficit financing is so cheap. This has not helped cut government debt in the Eurozone and the ECB's policies have to some extent mutualized some of the risks.

At 0700 GMT, Bundesbank president Jens Weidmann will give his welcoming remarks at the Bundesbank conference under the headline “An impossible trinity? An interplay of monetary, financial and fiscal stability”. The headline suggests plenty of opportunity for Weidmann to warn about the monetary excesses.

When German finance minister Wolfgang Schauble criticized ECB monetary policy, it was Weidmann who defended the ECB’s independence. This suggests Weidmann would not directly oppose ECB monetary policy. Rather, I expect he will deliver a solemn reminder of the risks involved. This could be interpreted as a dovish signal by investors, who tend to expect the worst from Weidmann. Then at 1215 GMT, a panel titled “Central banks’ challenges will include the ECB vice president Vitor Constancio.

In coming months, the ECB must decide how to adjust the government bond purchase programme before it reaches its constraints. The Eurosystem will run out of eligible German bonds before the programme’s current end date in March 2017. It is also an open question whether the ECB will continue the programme beyond that date – the official statement is “until the Governing Council sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term”.

The oil price has risen, and headline inflation is expected to increase, but market-implied inflation expectations have stuck  stubbornly close to all-time-lows. The Eurostoxx bank index has been carving out a nice triangle pattern, as shown in the following chart, and is getting close to the triangle's lower limit. A bounce should be expected, but at some point there will be breakout.

Eurostoxx bank index
Eurostoxx banks

Chart source: Saxo Bank

The next big event for the ECB watchers will be the ECB’s Forum on Central Banking – its own version of the influential Jackson Hole symposium, held on June 27 to 29.

US June Michigan Consumer Expectations (1400 GMT). The mid-June consumer sentiment is expected to have declined a bit after the May’s oversized jump.

Partly reflecting the cooler jobs data and higher oil prices, an expected fall from 95.8 to just 93.5 for May would still leave sentiment at its highest since June 2015.

US Michigan
Chart source: Saxo Bank

Next week brings us the Federal Reserve’s policy-setting meeting. Expectations of a Fed rate hike this summer have swung wildly in recent times, from fairly uncertain, then to almost certain, and finally to fairly unlikely!

Fed rate hike prospects
Fed odds
 Chart source: Saxo Bank

As the June meeting comes with a press conference, this will be the last opportunity for the Fed to prepare investors for a rate hike. Thus, while no rate hike should be expected next week, the fate of the hike in July will be stated next week.

Better-than-expected US data should thus be particularly supportive of the US dollar at the moment.

EURUSD chart

Chart source: Saxo Bank. Create your own charts with SaxoTrader; click here to learn more. 

For more on forex, click here.

– Edited by Robert Ryan

Juhani Huopainen is a blogger and a macro analyst at MoreLiver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.


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