ECB: Villeroy: Focus On Exchange Rate Volatility, Other Comments Dovish
Headlines crossing from ECB's Villeroy on Bloomberg TV (source Bloomberg)
- "*VILLEROY: CLOSELY WATCHING EXCHANGE-RATE VOLATILITY"
- "*VILLEROY: EURO APPRECIATION HAS CLEAR DISINFLATIONARY EFFECT"
- "*VILLEROY: STRONG EURO MAY INCREASE RISK OF INFLATION UNDERSHOOT"
- "*VILLEROY: RISK OF INFLATION UNDERSHOOTING IS INCREASING"
- "*VILLEROY: DON'T SEE INFLATIONARY EFFECTS FROM US TARIFFS"
Note the use of "volatility" rather than a specific level. The MNI Policy Team's latest sources piece noted that many Eurosystem officials were surprised by comments in Sintra by ECB Vice President Luis de Guindos, who said that if the euro kept appreciating above USD1.20 it “would be much more complicated” for the eurozone. The ECB will as always take note of how a strong euro could impact transmission of its monetary policy, and the higher it goes against the dollar, the more it will watch for impacts, one official said, noting that current levels aren’t a reason for concern.
Other headlines are consistent with Villeroy's generally dovish leaning
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RBA: VIEW: TD Add Nov Cut Into Forecast Profile
TD Securities note that “given the Bank's confidence on inflation, the weaker headline GDP print supports the case for further RBA easing. Hence, we add another 25bps cut to our profile for November, taking the cash rate to 3.35%. The Bank has signalled it's looking to ease a further two times following the May meeting”.
- They do not “see a strong case for the RBA to ease again as early as July, but this is where the risk lies. The RBA could justify a July cut as taking out insurance”.
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UK DATA: Services PMI revised upward; growth / labour market / inflation slowing
- There was an upward revision to the UK services PMI with the May print being revised to 50.9 from the flash print of 50.2. The composite PMI was also revised up, back above 50 to 50.3 from the flash of 49.4.
- Note that in yesterday's testimony in front of the Treasury Select Committee several MPC members noted that underlying indicators suggested that UK GDP growth was close to zero (in contrast to some of the one offs that have skewed the hard data upwards recently). There isn't much in this data release today that would suggest otherwise.
- The press release notes that the overall services numbers were "helped by improving confidence among clients and fewer reports of tariff concerns."
- Looking under the surface other details on the growth side were disappointing still:
- "Another decline in new order intakes across the service economy, although the rate of contraction eased since April and was only marginal."
- "Backlogs of work decreased at the fastest pace since February, largely reflecting a lack of pressure on business capacity."
- "Service providers widely commented on the non-replacement of voluntary leavers in May, which resulted in a sustained downturn in total employment numbers"
- Also encouragingly for the MPC as they look to continue reducing restrictiveness, despite cost pressures increasing with price inflation at a 7-month low:
- "The overall rate of inflation eased slightly since April, but was still among the highest recorded since the summer of 2023. This was linked to higher minimum wage rates and ongoing efforts by suppliers to pass on increased National Insurance contributions. Prices charged inflation across the service economy meanwhile slipped to a seven-month low, which was typically attributed to elevated competitive pressures."
