European stocks are heading for a softer open after a negative close on Wall Street and as investors look cautiously ahead to the ECB rate decision.
· ECB is not expected to hike rates today but instead signal to a July rate hike
· China exports jump 16.9% YoY in May but new COVID fears dent risk sentiment
· US jobless claims are expected to rise to 210k, up from 200k
Global stocks sold off yesterday and continue to fall today as global growth concerns continue to drag on sentiment. The OECD followed in the World Bank’s footsteps, slashing global growth forecasts due to the fallout from the Russian war and western sanctions.
Encouraging Chinese trade data overnight has failed to boost the mood. Chinese exports jumped by 16.9% YoY in May, up from 3.9% in April and well ahead of the 8% forecast. Imports rose a solid 4.1% YoY against expectations of a 2% rise. Instead, new Shanghai lockdown restrictions are keeping the mood sombre.
ECB
The main focus today is the ECB monetary policy meeting. The central bank will end net asset purchases, and while no rate hike is expected today, Christine Lagarde is likely to signal a July rate rise.
The meeting comes as CPI inflation in the bloc has risen to a record high of 8.1%. With PPI at record levels around 30% and oil prices pushing higher above $120, the ECB certainly has reason to consider a 50-basis point rate hike over a 25 basis point hike, which is priced in.
How aggressive does the ECB intend to be when tightening monetary policy? This will be the key question opening a new battleground for the hawks and the doves at the ECB. Currently, a smaller, 25 basis points hike is favoured by the majority of the governing council. Several policymakers have indicated that they are open to an outsized rate rise, although support for a larger hike could build over the summer.
A fresh round of quarterly economic projections will highlight the impact of the Russian war. The central bank is expected to downgrade its growth forecasts and upwardly revised inflation projections, with the 2024 medium-term inflation number expected to reach 2%.
EURUSD is rising for a third straight session and remains above 1.07. A hawkish ECB and the prospect of a new tightening cycle could keep the euro supported, particularly against the crosses.
US jobless claims
Looking out across the US session, initial jobless claims could attract some interest. Jobless claims are expected to rise to 210k after falling to 200k in the previous week. So far, the US labour market has shown resilience despite slowing growth, rising prices, and a deteriorating outlook. Investors will watch initial jobless claims closely for early signs of concerns in the labour market. A larger than forecast rise could unnerve the market.
Oil
Oil prices rose overnight, hitting a three-month high of over $123 following the stronger than expected Chinese trade data. However, news of new lockdown restrictions in Shanghai’s Minhang district has since exerted pressure on oil prices.
Peak driving season in the US is keeping prices buoyant. The EIA report revealed an unexpected decline in gasoline stocks, even as crude stockpiles rose.
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