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When Mario Draghi speaks Thursday, the market will be suspended for each of his words. Eurozone bond markets have rebounded sharply since the head of the European Central Bank said last month that a new round of easing measures was underway to tackle stubbornly low inflation and a economy slowing down.
Investors are banking heavily on interest rate cuts – perhaps as early as this week – and on stimulating bond purchases, known as quantitative easing, later in the year. If the July rate cuts did not materialize, Mr Draghi's predictions would be crucial: he would usually have to add the words "or lower" to the ECB's forecast that rates will remain at their current level until next summer.
Nothing less could disappoint the markets, according to Marchel Alexandrovich, senior European economist at Jefferies. "People have negotiated baduming more EQs before the end of the year and may have a few steps in advance," he said.
Currency traders also set the bar high for Draghi, according to badysts at Nomura.
"We think that the euro will be little present at the meeting of the ECB, but the risk of disappointment is relatively high and a reflex rebound is possible in the short term," they wrote.
Even in this case, investors seem convinced that the ECB will deploy its big guns later in the year. According to a Bank of America Merrill Lynch survey, more than 60% of fund managers expect more bond purchases to be purchased by the end of the year. This conviction may continue to weigh on bond yields.
"I do not think Draghi will shut the door on anything," said Alexandrovich. "Whatever happens at the July meeting, further flexibilities are coming." Tommy Stubbington
Will economic data continue to follow the Fed?
The US central bank has moved in a much more accommodating direction over the past month, moving from signaling that interest rates are on hold to suggest that the first rate cut in almost a decade could be considered when his next meeting. The problem is that economic data has challenged this view since the change of the Fed.
Last month's employment data belied the economists' forecasts when they were released in early July. The core inflation rate then accelerated, and last week the US retail sales figures were surprisingly strong, indicating that the economy's drivers remain strong.
"Retail sales have crushed it," said Tom Porcelli, chief US economist at RBC Capital Markets. "In other words, the Fed is about to cut rates, even in the face of very strong economic fundamentals."
Investors still believe the central bank will cut interest rates on July 31 – a conviction reinforced by President Jay Powell's dovish testimony to Congress earlier this month – but if data remains solid next week doubts could begin to emerge. the next five days are Markit's Purchasing Managers' indices for services and manufacturing, home sales, durable goods orders and jobless claims. The week ends with the first estimate of overall economic growth in the second quarter.
The pace of growth is expected to decelerate from the astonishingly rosy first quarter, but another round of dynamic data could embolden the Fed's hawks and force investors to rebadess their views on several upcoming rate cuts.
"By reducing rates now, [the Fed] risk of not having the firepower if the economy spills and goes into recession, "said Chris Rupkey, Chief Finance Economist at MUFG. "Save on rate cuts on a rainy day," say consumers at the Fed. "We do not need them." The Fed says they listen; Let's see if that's the case. " Robin Wigglesworth
Will the global economic outlook improve?
The International Monetary Fund is due to publish Tuesday an update of its Global Economic Outlook, providing clues to the state of the global economy as a result of a negative badessment of global growth in April.
In its latest publication, the IMF highlighted the drag on trade tensions on growth and said monetary policy remains somewhat restrictive, reducing forecasts for 2019 and 2020. Since then, rations between the United States and China remained unresolved and the United States opened commercial war fronts with Mexico, India and the EU – but the Fed began to signal the beginning of a cycle of reduction rates.
"Central banks are moving towards monetary easing, as they aim to mitigate the global slowdown caused by trade tensions," BlackRock badysts said. "This political pivot should help stretch the [economic growth] cycle."
Three months ago, the IMF had hoped for a "precarious" recovery of emerging markets, an end to crisis conditions in Argentina and Turkey and a stabilization of China's growth rate.
Argentina's economy has actually improved, while Turkey emerged from three quarters of contraction in May. The Chinese economy, however, has recorded the slowest growth in nearly 30 years, despite domestic consumption support.
With a panoply of signals to badimilate, badysts do not expect a major change in the July update of the Fund. According to a consensus forecast of economists surveyed by Bloomberg, global growth is expected to reach 3.3% in 2019, which is quite in line with the previous IMF estimate. Siddarth Shrikanth
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