ECB Preview – Hawkish cut
The ECB will be the third G10 central bank to lower rates on Thursday, by 25bp to 3.75%. The cut has been widely anticipated and is almost fully priced by markets, but the outlook thereafter is tricky, as highlighted by last week’s inflation figures. Headline and core HICP rose by 0.2% to 2.6% and 2.9% respectively, while the services subcomponent rose by 0.3% to 4.1%. Goods disinflation continued, falling by 0.1% to 0.8%, but was not sufficient to counter the rise from services. As a result, we believe the ECB will revise their quarterly inflation projections higher, causing an awkward backdrop for the cut. Markets have almost fully removed prospects for a July cut, and also only see just more than 2 cuts in total by year-end. As things stand today, we believe this ECB cut may soon be viewed as a policy mistake.
US Economics – Payrolls set the tone ahead of Fed
Friday’s Nonfarm-Payrolls will kick off a new round of US data, with consensus expecting little change from last month at 180k. Further indicators are likely to underline that the labour market has moved into better balance, but given the volatility in NFP prints and revisions, we believe the greater reaction in markets would come from a downside surprise, with CTA funds still short Treasuries. Last week’s PCE inflation concluded the previous round of data, and at 0.25% core MoM came in line with expectations. The Fed’s favourite inflation measure has now averaged 3.5% over the past three months, on an annualised basis, and confirms insufficient progress for the Fed to start cutting.
Turkey – Turnaround story
Turkey’s recent orthodox policy shift is seen as very positive by investors, as we learned during our research trip to Istanbul last week. The pace of de-dollarization and switch into Lira deposits is happening faster than expected, while rising USD reserves are making the economy more resilient. Investors are concerned whether policy is sufficiently tight to quell strong demand, but inflation is expected to fall quickly post its likely May peak around 75%. The summer months will bring additional inflows to the country from tourism, giving the market confidence to participate in the carry trade.
Algebris Investments’ Global Credit Team
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