The European Central Bank is set to leave monetary policy on hold when it meets in Vienna on Thursday. That’s not the only thing that will remain steady: most economists expect the ECB to keep its 2016-2018 inflation forecasts unchanged from March. While that may suggest that ECB President Mario Draghi still has some work to do, it would mark the first time in a year that officials haven’t had to downgrade their outlook for consumer prices.
With oil prices LCOc1 almost doubling since early January, the ECB will nudge up its inflation projections, breaking a cycle of having to cut forecasts quarter after quarter, and supporting ECB President Mario Draghi's call for patience with measures already taken.
Indeed, corporate bond buys, announced in March, will only start in June, and the first allotment of ultra cheap loans is not due until later this month, indicating that more stimulus is already in the pipeline and supporting an argument by some policymakers for the ECB to stay on the sidelines at least until autumn.
The U.S. Federal Reserve's decision on a possible rate hike this summer and Britain's vote on membership in the European Union this month also raise uncertainty and support the case for a steady course.
Any core inflation cut would not trigger fresh ECB measures on Thursday but raises the likelihood that the ECB will eventually extend its asset buying scheme, which is set to run at least until March 2017.
"Our expectation is that the QE program will be extended to the end of 2017 and we think that an announcement could be made in September," JPMorgan economist Greg Fuzesi said.
"The medium-term inflation forecast remains low-ish, which creates the risk of an unanchoring of inflation expectations," Fuzesi said. "Ending quantitative easing in March would also cause an unwanted tightening in financial conditions."
Yen sits atop big gains on risk aversion, policy disappointment
The yen sat on top of large gains against its peers early on Thursday after surging on risk aversion and disappointment over lack of clear policy guidance by Japan following a decision to delay a consumption tax hike.
The dollar was steady at 109.480 yen JPY=, having slid from a high of 110.830 overnight as a big drop in Tokyo stocks fueled bids for the safe-haven currency.
The greenback, which had soared to a one-month high of 111.455 yen on Monday on expectations for an early U.S. rate hike, also took a big knock after Japanese Prime Minister Shinzo Abe announced on Wednesday that he was delaying a sales tax hike by two and a half years.
There are three factors behind the dollar/yen tumble. First was the deterioration in risk appetite. The second was that the dollar was vulnerable after having risen too sharply," said Shin Kadota, chief Japan FX strategist at Barclays in Tokyo.
"Lastly, some participants appeared let down that the prime minister did not accompany the tax hike delay announcement with clear stimulus plans."
Worries about whether Britain will vote to stay in the European Union or not later this month also buoyed the yen, although the Japanese currency did give back some its big gains against the dollar late Wednesday on the stronger-than-expected Institute for Supply Management (ISM) U.S. factory activity numbers.
Oil Prices Flat Ahead of OPEC Meeting
Crude-oil prices largely stayed put in early Asian trade Thursday as traders await the outcome of a meeting of the Organization of the Petroleum Exporting Countries later in the day, where discussion on a collective output ceiling could be revived.
On the New York Mercantile Exchange, light, sweet crude futures for delivery in July traded at $48.93 a barrel at 0204 GMT, down $0.08 in the Globex electronic session. August Brent crude on London’s ICE Futures exchange rose $0.05 to $49.77 a barrel.
After OPEC scrapped its production ceiling in December, oil prices descended to 13-year lows within weeks. Most analysts said the meeting will largely be a formality with the cartel sticking to the “no-cut” strategy as players are mainly driven by competition for market share.
"I see nothing of consequence that will be discussed at this meeting," Tom Kloza said Tuesday on CNBC's "Futures Now."
The global head of energy analysis at the Oil Price Information Service is adamant that no progress was made between Saudi Arabia and Iran during OPEC's last gathering in Doha, Qatar. Therefore, he believes that the table is not set for any sort of announcement regarding a freeze or cut in June.
Moreover, a rebound in prices in recent months, spurred by declining production outside of OPEC has undercut any impetus for a production cut.
“We think that the production freeze agreement last formally rejected with Brent trading at $40-$45 will be rejected again Thursday,” said Tim Evans, a Citi Futures analyst, who expects OPEC production to hit 33 million barrels a day later this year.
Market watchers will also eye the weekly U.S. crude data to be released later on Thursday. Analysts surveyed by The Wall Street Journal estimate a 2.8 million-barrel drop in domestic stockpiles, while industry group American Petroleum Institute expects a 2.4 million-barrel expansion.
Reference: Bloomberg, Reuters, CNBC, The Wall Street Journal
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