3 Numbers: ECB’s Draghi and IMF weigh into Brexit
- Expect soothing words in Draghi’s speech
- IMF’s report on Brexit will undoubtedly say leaving would be bad for everyone
- US housing data continues stabilising after a weak Q4-Q1
ECB speeches (1245, 1500 GMT)
European Central Bank board member Benoit Coeure speaks at 1245 GMT in the International Conference on Structural Reforms in Advanced Economies.
The topic should be obvious – structural reforms are needed to increase productivity – but there remains much disagreement over what those reforms should be and how they could be done in the current political climate.
ECB president Mario Draghi will be speaking at 1500 in honor of Theodor Waigel at conferral of SignsAwards. Waigel was a finance minister in Helmut Kohl’s cabinet and often referred to as the “father of euro”, who promised to “bring the D-mark into Europe”.
The speech will most likely praise Waigel’s work – that is, the euro, and how the ECB and all other institutions will safeguard the euro’s well-being and the future. The difficulties of reaching the euro area’s inflation target have diminished the central bank’s credibility and financial markets have reacted negatively to the Brexit.
This speech is an opportune moment to drop a word or two that the ECB stands ready to do “whatever it takes”.
A possible guarantee from Draghi would indicate readiness to ease monetary policy further.
Perversely, as the EUR has been sold in the markets because of the Brexit risk, Draghi’s guarantee could actually strengthen the EUR for now. Largest beneficiaries could be European bank stocks, which have been hit hard.
IMF’s report on Brexit
The report will probably warn about the negative economic effects of Britain leaving the European Union. A month ago the IMF said the effects of leaving could range from “pretty bard to very, very bad”.
Of course, no-one is certain what would happen in the case of a Brexit, but the consensus view is solid that in the short-run it would be a notable negative, and in the long run it would have relatively little effect, assuming that negotiations produce a good outcome.
Previous warnings from the UK Treasury, the IMF or US president Barack Obama have not changed the opinion polls. But the report could have significance to investors, as a dark and gloomy report could increase the risk premium attached to the event.
With the “leave” currently leading the polls, a negative report could thus put additional pressure on the GBP and stock market.
The IMF released its annual euro area’s concluding statement of the 2016 article IV mission yesterday:
I think the message is clear: the Eurozone is a mess, there are plenty of risks and little that could be done if the risks are realized – thus, the euro area does not need, and perhaps could not afford to have Britain voting to leave the union.
US May Building Permits & Housing Starts (1230). US housing markets cooled in end of the 2015 and remained so for the beginning of 2016. As the overall activity after the bad first quarter has been picking up, also housing data showed improvement in April.
The housing starts are expected to have decreased a bit to 1.15 million annual rate from 1.172 million in April, while building permits are seen to have increased to 1.15 million from 1.116 million in April.
Even if the consensus forecast data is not met, after April’s improvement it would not be an outlook changer. The longer-term chart suggests that the trend growth rate of building permits and housing starts has slowed from the early recovery after the crisis, but remains solidly positive.
The shorter-term chart shows both of the time series moving higher with a steady growth rate, and the temporary ups and downs around the trendline are well-contained by a relatively narrow trend channel.