Good morning,

Draghi steps up inflation and Brexit risks

Europe is the focus throughout markets at the moment; focusing on what the European Central Bank can do to support growth and inflation and focusing on what relationship the UK will have with the European Union when we wake up in 3 weeks time.

As was unanimously expected yesterday the European Central Bank decided to keep interest rates on hold with the main refinancing rate at 0% and the deposit rate paid on banks’ reserves left at the ECB staying at 8am. It also announced that its credit easing programme – buying bonds from companies as well as from countries – will begin on June 22nd.

So far, so normal.

Brief optimism

Within the press conference, Mario Draghi upgraded the Bank’s estimates of inflation ever so slightly – a 0.2% increase this year against 0.1% expected in March, growing to 1.3% in 2017 and 1.8% in 2018 – and also pushing near term growth expectations higher. To say these are revisions may be a little disingenuous. They are tweaks and fiddling that could easily be erased on the basis of a supply shock or another soft patch of demand.

Elsewhere there was little in the press conference to get excited about and the euro traded solemnly. Draghi did weigh in on Brexit briefly by advocating that the UK would be better served by being part of the EU and vice versa also adding that the ECB is ‘ready for all contingencies’.

Crowd vs Cameron

The Brexit debates started last night with David Cameron on Sky News in front of a studio audience. A studio audience who, regardless of their thoughts on Brexit, did not like the Prime Minister. The PM is a polished PR man but really struggled to articulate a message of what could happen to the UK in the event of a Brexit and will hope that Michael Gove doesn’t continue the Leave camp’s momentum in a similar debate tonight.

With 3 weeks to go I do not think it is incorrect to say that it is anyone’s to win; Leave have the momentum and opinion polls are frankly a mess. Given the level of campaigning *glances towards the floor* it is no surprise that polling is so confused; the electorate is confused and I think polls are showing more of an off-the-cuff-which-way-the-wind-is-blowing-at-this-particular-moment voting intention, not longer held beliefs. In this atmosphere momentum is key; the Remain camp has to get agitated.

The Day Ahead

While we receive news from the global services sector through the course of the day it is this afternoon’s payrolls announcement that’s truly the most important release of the week.

We believe that the payrolls will have been taken lower by labour action at Verizon so a print of 140-150k shouldn’t be seen as poor. Wage pressures remain the silver bullet for every Western economy and a pick up here will see the dollar fly; we look for a wage increase of 2.5%. Last week’s numbers productivity numbers suggested that at a 30yr low, they will be an issue for the Fed in the longer term if corporate spending on R&D does not increase but for now, higher wages will be like mother’s milk for the greenback.

The US jobs report is due at 13.30

Have a great day and a better weekend.

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