CAC Ticks Lower, Shrugs Off Strong French Data

The CAC index has inched lower in the Friday session. Currently, the index is currently trading at 5135.80 and is down 0.31% on the day. On the release front, French Industrial Production posted a strong gain of 1.9%, well above the estimate of 0.5%. There was more good news as France’s trade deficit narrowed to EUR 4.9 billion in May, compared to the April reading of EUR 5.5 billion. This was the smallest trade deficit recorded in 2017. In the US, Nonfarm Employment Change rebounded strongly, climbing to 222 thousand.

With the euro-area economy showing improvement in 2017, there is growing speculation that the ECB will withdraw from its easing program. At last week’s ECB forum, the markets seized on Mario Draghi’s comments as a signal that the bank was closer to such an exit, and European stock markets lost ground. The ECB minutes from the June meeting indicated that  policymakers discussed removing the bank’s “easing bias” at the June meeting, but ultimately decided against such a move, on the grounds that stronger economic conditions had not resulted in higher inflation. The minutes were cautious in tone, noting that “it was necessary to avoid signals that could trigger a premature tightening of financial conditions”. ECB chief economist Peter Praet also weighed in this week, saying that eurozone economic growth is accelerating, but the ECB still needs to provide a “steady hand” in order to spur stubbornly low inflation levels. Next stop for the ECB is the July policy meeting. In June, the bank removed an easing bias towards lowering interest rates. However, policymakers may now be wary about sending more signals of tightening policy, so as to avoid another run on the euro. The ECB doesn’t want the rate statement to shake up markets, so we could see a bland statement, to the effect that the economy is headed in the right direction, but QE will remain in place until inflation levels move higher.

The Fed has all but promised a third rate hike in December, but the markets are skeptical, with the odds of a rate hike at just 49%. There is a lack of clarity about the Fed’s monetary plans, and the minutes from the June policy meeting did little to address this issue. The minutes pointed to a divided Fed over the key issues of inflation and the Fed’s bloated balance sheet. Some members expressed unease at the Fed’s current forecast of rate hikes, given the persistently low levels of inflation. According to the current “dot plot”, the Fed expects to raise rates in December, and three times in 2018. There was also division over the timing of reducing the $4.2 trillion balance sheet – some policymakers were in favor of starting in September, while others preferred later in the year. At the June meeting, the Fed stated that it would begin reducing the balance sheet this year, but provided no details. Analysts expect the Fed to start winding down the balance sheet in September, prior to a rate hike in December. The markets are lukewarm about a rate hike in December, with the odds at just 49%, according to the CME Group.

Economic Calendar

Friday (July 7)

• 2:45 French Government Budget Balance. Actual -66.4B
• 2:45 French Industrial Production. Estimate 0.5%. Actual. 1.9%
• 2:45 French Trade Balance. Estimate -4.9B. Actual -.4.9B
• 8:30 US Non-Farm Employment Change. Estimate 175K. Actual 222K

*All release times are EDT

*Key events are in bold

CAC, Friday, July 7 at 8:40 EDT

Open: 5155.75 High: 5157.25 Low: 5126.50 Close: 5135.80

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