Stocks Consolidate as Central Banks are Not Ready to Remove Easing Bias

European stock markets are slightly down. Yesterday’s ECB source story suggesting that the central bank is not ready to remove the easing bias on QE helped stocks to rally during the afternoon session and today’s correction looks modest in comparison, with the DAX down slightly on the day and still clearly above the levels seen early yesterday. The FTSE 100 is down  and the Euro Stoxx 50 has also lost ground as North Korea’s latest missile test weighed on risk appetite and also weighed on Asian markets overnight. The Hang Seng closed with a loss of more than 1.50%, while losses were more muted in Japan and the ASX rallied 1.75% after the central bank left rates on hold. Global central bank support clearly has peaked and markets remain sensitive to indications about the future rate path and the pace with which officials are moving towards exit steps. With the U.S. on holiday trading is quieter than usual.

Eurozone producer price inflation fell back to 3.3% year over year in May from 4.3% year over year in the previous month. The deceleration was mainly due to base effects and not unexpected after national data, but it will help the arguments of the doves at the ECB, who remain cautious about moving too quickly towards tapering steps. Still, while the doves can point to the marked decline in the number, the hawks will stress that the headline rate remains quite high.

Swedish Riksbank Leaves Repo Rate Unchanged, Scales Back Easing Bias

The Riksbank left the repo rate steady at -0.50% as widely expected, but tweaked the guidance by saying that it is now less likely to cut the repo rate than previously. The rate path now envisages rates remaining at their current level until mid 2018, rather than indicating the potential for further cuts through the end of the year. The bank said “the fact that inflation has recently been slightly higher than expected and that the risks of setbacks abroad are thought to have decreased makes it less likely than before that the Riksbank will cut the repo rate in the near time”. However, like the ECB the Riksbank has not fully removed the possibility of further easing, saying that “this does not rule out repo rate cuts in the period ahead”.

The UK June construction PMI missed expectations, ebbing to 54.8 in the headline reading of the survey from 56.0 in May. The median forecast had been for a 55.0 reading. The details highlighted softening in new orders and employment, while business optimism in the sector declined to its weakest reading for 2017 so far. Survey respondents reported a rise in risk aversion among clients, according to Markit, the compiler the survey, which may not be surprising given the unexpected election outcome on June 8. At 54.8, the indicator is still the second highest since December 2015, and shows a sector that is continuing to expand robustly. Nonetheless, deceleration will have investors on edge given the fragility of the minority government and the risk that this backdrop poses to just-commencing Brexit negotiations. Tomorrow’s release of the services PMI will be more keenly watched for signs of how the broader economy is performing, and possible implications for BoE policy.