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Alexis Tsipras's surprise decision to call a referendum on proposals by Greece's creditors marked the end of negotiations. An agreement in principle on a number of issues had been found, but one key component was missing: the conditions governing a further debt restructuring. Tsipras is doing a balancing act between pressures from Syriza's left wing and the creditors, and in doing so is gambling his political survival.
The positive surprises provided by Swedish inflation data in May and the rebound in inflation expectations have lowered the odds of a rate cut from the Riksbank at its next meeting (1 July, announcement of decision on 2 July). We expect the Riksbank to leave the repo rate unchanged at -0.25%. We have delayed our expectation of a 10bp cut in the repo rate to September.
There was no change in the fed funds target range (0 to 0.25%) or the FOMC's portfolio reinvestment policy at today's meeting. The FOMC continues to anticipate that "it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term."
Draghi's "get used to volatility" comment should not be misinterpreted as an inflexible ECB stance. The ECB has kept a dovish bias, which suggests that it would respond to unwarranted monetary tightening eventually in case bond yields (especially real yields in the periphery) and potentially the EUR continue to grind higher.
No rate hikes are expected as policymakers continue to assess progress towards the conditions conducive to lift-off. Those include (1) a continued improvement in labor market conditions and (2) reasonable confidence that inflation will move back to its 2% objective over the medium term. We believe the Fed is close to meeting its employment mandate. However, the Fed is likely to require more evidence before being reasonably confident that inflation will rise towards its 2% objective over the medium term.
The ECB delivered no particular surprise at today's meeting, but we are left with a sense of dovishness following Draghi's allusion to "a slight loss of economic momentum" and, to a lesser extent, the small revision to 2017 GDP growth, from 2.1% to 2.0%. The ECB's commitment to QE remains unchallenged. He did not hint at any change to QE modalities either in response to greater volatility. Draghi called for a "strong agreement" with Greece.
We expect the ECB to stay the course at its 3 June policy meeting, insisting once again on its firm commitment to full QE implementation. New hints at QE flexibility would help the Governing Council adjust to more adverse market conditions in the future. While a 'rule-based' ECB has every reason to be strict with Greece, it is still unlikely to be the one cutting off liquidity to Greek banks.
Spanish regional and municipal election results marked a major setback for the two large traditional parties and confirmed the support for leftwing Podemos and centrist Ciudadanos. The political fragmentation will probably lead to some kind of coalition government after general elections due by December. Given the country unfamiliarity with coalition governments, some political instability should be accounted for. Adjustments to the current economic and fiscal policies are likely.
Our review of current research suggests that there are reasons to believe that the stall in Q1 real GDP may not have been as dramatic as previously thought. Output growth, as measured by the income-side of the national accounts, has been tracking at a stronger pace than GDP and issues of residual seasonality have depressed Q1 GDP growth measures. We believe the balance of evidence supports the contention that Q1 seasonally adjusted real GDP growth rates are regularly understated by around 1½ percentage points.
Judged by its immediate objectives, ie, a drop in sovereign interest rates and the risk premiums of so-called peripheral countries, the monetary policy of the ECB is a success. In this connection, does the manifest success already achieved go beyond the originally hoped-for results? Historically ultra-low (if not almost zero) nominal interest rates, even on very long maturities, and, even more to the point, negative interest rates, are raising thorny economic issues – to put it mildly.
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