CAC Dips, Euro Jumps on Draghi Aftermath

The CAC index has posted losses in the Thursday session. Currently, the index is down 0.68% and is trading at 5220.80. On the release front, there are no eurozone or French indicators on the schedule. In the US, Preliminary GDP is expected to gain 1.2%. On Friday, the Eurozone publishes CPI Flash Estimate and France will release Consumer Spending and Preliminary CPI.

Mario Draghi was on center stage at this week’s ECB forum in Portugal, but he probably was not counting on a sharp euro rally just after delivering his prepared speech. Draghi presented an optimistic view of the euro-area, acknowledging that economic indicators continued to point to a broadening recovery in the eurozone. Draghi noted that the recovery was broad, but pointed to inflation as the barrier to tightening policy. Draghi defended the bank’s loose accommodative policy, saying that it had pushed inflation higher, but stimulus was needed until inflation becomes “durable and self-sustaining”. Draghi’s comments did not appear to be a major change from previous statements, as the ECB has said time and time again that the bank has no plans to remove stimulus until inflation levels in the eurozone are closer to the ECB’s target of 2 percent. However, the markets clearly think otherwise, as Draghi’s comments have raised speculation that the ECB is planning to tighten policy. After the euro jumped, the ECB beat a hasty retreat, as sources said that the markets had “misinterpreted” Draghi’s remarks. This impeded the euro’s rally, but only briefly. The ECB has consistently said that it would not reduce stimulus until inflation moves closer to the ECB’s target of 2%, but the message the markets appear to have heard is that the long war on inflation has been won, so it’s only a matter of time before the ECB wraps up its monetary stimulus. If investors remain convinced that the ECB’s easy money policy is on its way out, European stock markets could lose ground.

The presidential and parliamentary elections in France have turned French politics upside down, as the old left-right divide has been erased, at least for now. Then new president, Emmanuel Macron, is a relative newcomer to French politics, and his En Marche party, which has a majority in parliament, is little more than a year old. Macron appears determined to bring major changes to France, and his message has clearly struck a note with French voters. The sense of renewed optimism was underscored by the latest INSEE consumer confidence report, which jumped to 108 points in the June report, up from 103 in May. This marked the highest level since 2007. Although consumers are in a good mood, this optimism has so far not translated into stronger consumer spending, but nevertheless is another sign that the French economy is improving. INSEE has revised upwards its estimate for France’s GDP for the first quarter to 0.5%, up from 0.4% earlier in June.

Will the US GDP report miss expectations? The economy is expected to grow 1.2%, but there are worrying signs that Final GDP might miss this target. Recent US economic data has been softer than expected, notably construction and manufacturing reports. US durable goods releases were weak in May. Core Durable Goods broke a streak of two straight declines, but the weak gain of 0.1% missed expectations. Durable Goods declined 1.1%, its sharpest decline since June 2016. The slowdown in orders of business equipment could weigh on second quarter growth. Last week, it was the turn of construction numbers to disappoint, as Housing Starts and Building Permits both missed expectations. Consumer spending has also been softer than expected, and if Final GDP falls short of the modest estimate of 1.2%, investor sentiment could sour and send the stock markets lower.

Dollar under pressure

EUR and GBP Extend Gains on Tightening Prospect

Economic Calendar

Thursday (June 29)

• 8:30 US Final GDP. Estimate 1.2%

Upcoming Key Events

Friday (June 30)

• 2:45 French Consumer Spending. Estimate 0.5%
• 2:45 French Preliminary CPI. Estimate 0.5%. Actual 0.0%
• 5:00 Eurozone CPI Flash Estimate. Estimate 1.2%

*All release times are EDT

*Key events are in bold

CAC, Thursday, June 29 at 8:40 EDT

Open: 5267.50 High: 5274.30 Low: 5209.80 Close: 5220.80

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