Slow US recovery

Market movers today

In Norway, today brings inflation numbers for June. Core inflation surprised to the upside in April and May, with the annual rate climbing to 3.0% on the back of higher import prices. The pressure on imported prices from a weaker currency is reinforced by the closed borders. Hence, we expect core inflation to edge up to 3.1%.

In Sweden, Riksbank minutes is the key release. We focus on (1) discussion about the low level of inflation and inflation expectations, (2) considerations as to the recent expansion of the QE programme and (3) thoughts about the repo rate path, which is unbiased at 0% throughout the forecast horizon, whereas the rhetoric suggests it has an easing bias.

We expect Danish CPI inflation to rebound to 0.5%, following two months with zero. The primary driver behind the increase is energy prices, but also the April tax increase on tobacco should have started to check through cash registers by now. The summer sale on clothing is likely to be bigger this year, which will weigh on inflation as there is still a large backlog on clothing sales and retailers are likely to cut prices more than usual to increase turnover.

Today, Fitch has Italy up for review. The question is whether Fitch decides to be tough and downgrade Italy. We expect that it will remain on hold given that the ECB and EU are showing strong support for Italy through QE and the expected recovery fund.

Selected market news

Markets continue to appear somewhat caught between the recent easing of global monetary and fiscal policy and renewed uncertainty about the outlook due to US coronavirus numbers and a somewhat slow decline in US unemployment claims, among others. In equities, it continues to be mainly the technology sector that is leading advances, whereas more classical cyclical sectors such as autos, banks and industrials have gone sideways in recent weeks. Coronavirus seems to be under control in the EU but in the US there is no sign of a peak yet. Recent virus problems in the US present a material risk to the US recovery in the coming months, whereas the euro area service sector recovery is set to continue barring any second virus waves during the European holiday season. See Service sector recovery after the coronavirus shock - euro area outshines US for once, 9 July. 

At next week's ECB policy meeting we expect a repetition of recent comments from various governing council members, thereby striking a cautiously optimistic tone compared to the June projections. For spot FX, the direction and stance of the ECB and euro area fiscal politics are, in our view, quite well priced and communicated (though to a lesser extent when it comes to the outcome for Brexit). In turn, it will be the extent and speed of the global recovery that sets the tone in EUR/USD. We remain constructive and expect broad USD to decline over the coming months and our 3M forecast is 1.15. See more in ECB research - Steady course, but cautiously optimistic (10 July).

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