Global Daily – Trade wars not yet shifting ECB policy

by: Nick Kounis , Bill Diviney

ECB View: Draghi and Coeure stick to June guidance – ECB President Mario Draghi spoke before the European Parliament this afternoon, while Executive Board member Benoit Coeure gave an interview to Bloomberg over the weekend. The main message from both officials was that the risk of a trade war was not yet impacting the trajectory for the ECB’s monetary policy compared to the exit path set out last month. Mr Draghi said that ‘while uncertainties related to global factors, including the threat of increased protectionism, have become more prominent, the risks surrounding the euro area growth outlook remain broadly balanced’ and ‘our confidence in the inflation path is also rising’. Mr Coeure made the point more strongly, saying that ‘so far what we’ve seen doesn’t have potential to derail the recovery’ and that the risks were already taken into account in the ECB’s June decision so there was no reason to ‘change policy expectations’. It looks as if it would take a much more significant rise in protectionism and/or a bigger impact on business confidence for the ECB to communicate an even slower path towards the exit. Our base case is that the ECB will keep policy rates on hold until December 2019 given weak underlying inflationary pressures. (Nick Kounis)

US Macro: Return of prime-age workers means Fed is unlikely to up rate hike pace – Last Friday’s June payrolls report was textbook ‘goldilocks’ – continued strong jobs gains (+212k, with +37k net revisions over the previous two months), but little suggestion of a labour market that is overheating or pushing against capacity constraints. Indeed, despite strong jobs growth, unemployment actually rose by 0.2pp to 4.0%. This was due entirely to a rise in labour force participation, which increased to 62.9% from 62.7%. The rise in participation is being driven by a return of (perhaps once-discouraged) prime-age workers to the labour market, which is offsetting the mechanical downward pressure on participation from the ageing population. We think this recovery in prime-age participation has further room to run in the coming months, which should help continue to keep wage pressures contained. As such, while we continue to expect one 25bp hike per quarter until June 2019 (i.e. four more hikes), the risk that the Fed moves at a quicker pace than this is very low, in our view. (Bill Diviney)