Call for central bank easing intensifying

Christin Tuxen Danske Bank A/S

Market movers today

Today the voting in the UK Conservative Party leadership contest begins, where the Conservative members of parliament starts the process to narrow down the number of candidates from ten to just two. Boris Johnson is the clear favourite to succeed Theresa May but nothing is certain, as the Conservatives have a long history stabbing each other in the back. Yesterday, Boris Johnson said he wants a deal with the EU amid the House of Commons rejecting to rule out no deal Brexit by a small majority (however, it was a warning shot that the new Prime Minister should not try to bypass the Parliament). Eventually, a majority in the House of Commons can always force the prime minister to resign in a no confidence vote, if necessary.
The Swiss central bank (SNB) decides on monetary policy today at 09.30 CET; unchanged rates (at -0.75% for both the Libor target and sight-deposit rate) are widely expected. More in FX section overleaf.
Italy's fiscal stance on the agenda at the euro-zone finance ministers meeting in Luxembourg today.
In light of the weak nonfarm payrolls on Friday, we will monitor the initial jobless claims more closely than usually. Jobless claims have in general remained low.

Selected market news

The call on central banks to ease continues to intensify by the day. Yesterday a s oft US inflation report which saw US CPI come in at 1.8% y/y (vs consensus 1.9%) fuelled expectations for further Fed cuts. Further, a rise in Australian u nemployment rose to 5.2% (from 5.1%), and albeit partly higher by a higher participation rate, this fuelled RBA easing bets further. AUD/USD weakened and USD/JPY dipped close to 108. Today, the SNB holds its quarterly policy meeting and while inflation prospects also call for easing there, it will be challenging to deliver as the SNB - opposed to the Fed and the RBA - are severely constrained on its toolbox; more in FX section.

In the same vein, central bank credibility continues to be challenged with notably Euro area (market-based) inflation expectations taking a nose-dive yesterday. The 5y5y inflation swap rate declined to 1.18%, setting another all-time low print. While there was no particular catalyst for the drop yesterday, such moves should be much concerning to the ECB: this essentially suggests that markets do not believe in the narrative Draghi conveyed last week at the press conference that ECB has the necessary tools to deal with a downturn. Draghi's welcome address at the Sintra conference next week will be closely watched for any clues about future ECB policy actions.

Separately, while the trade woes are lurking still, the US president opened a new front - this time against Germany criticising Merkel's support for the NordStream2 gas pipeline from Russia and threatened with new sanctions. Equity markets were generally weaker in both the US and Asia with Nikkei down close to 0.5% at the time of writing. US Treasury yields lower to 2.11%. Oil also on a weak footing with Brent just above the USD60/bbl mark.

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Christin Tuxen

Danske Bank A/S

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