The Week in Focus: July 10 – 14 Outlook

July 9, 2017 (Commerzbank AG) – Will Draghi’s taper bluff succeed?

The ECB will soon have to reduce its bond purchases even though its policy goals have not really been attained. To avoid this being regarded as weakness, the ECB is increasingly likely to highlight the improving economy. And chances are it will be successful with this bluff.

Forecast changes: Stronger growth in the Eurozone

On our monthly forecast meeting we raised our growth forecast for the Eurozone. We now expect an increase of real GDP by 2% in 2017 (up from 1.8%). Other forecasts were mostly confirmed.

Outlook for the week of 10 to 14 July 2017

  • Economic data: For the Fed, the fact that inflation is not rising remains a major concern. Progress towards the inflation target will remain slow. In the euro zone, industrial production looks set to have stagnated in May, despite buoyant sentiment.
  • Bond market: While pending data releases out of major economies will impact markets late next week, Yellen’s testimony before the Congress at mid-week could kick off more upward pressure on long-term sovereign bond yields.
  • FX market: ECB President Draghi is making use of the more optimistic economic outlook to signal an exit from the ultra-expansionary monetary policy. In fact ECB rate hikes will only start supporting the euro towards the end of next year, however.
  • Equity market: Led by speculation over an ECB exit from its expansionary policy, volatility in the German equity market temporarily rose last week. This reversal in monetary policy should weigh on debt-ridden stocks, in particular, and the rate-sensitive real estate sector is likely to also come under pressure.
  • Commodity market: The three energy agencies will probably point to a more gradual reduction of the high oil stocks. But following the recent production numbers, this will barely move oil prices.

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