July 20, 2017 / 7:19 AM / 2 years ago

Daily Briefing: Draghi negotiates inflation-growth disconnect

LONDON (Reuters) - Mario Draghi may be tempted to keep his regular press conference after the ECB rate-setting decision today short and sweet, the better to avoid any fresh misunderstandings about where the bank is going with the gradual winding-down of its post-crisis stimulus programme.

European Central Bank President Mario Draghi listens during a news conference following the Governing Council meeting in Tallinn, Estonia, June 8, 2017. REUTERS/Ints Kalnins

The main problem he and other central bankers around the world face in communicating a return to tighter policy is that the traditional justification they can cite for this - rising inflationary pressures - isn't really there.

The apparent disconnect between weak inflation and improving growth makes markets apt to over-interpret him when he so much as hints at more hawkishness - as happened with his recent comments in Sintra, Portugal.

The Bank’s very gradualist aim today may well be simply to prepare its audience for an announcement in September of a tightening that will kick in from next year. In the meantime, one specific thing to look out for in the ECB statement may be whether it removes its current pledge to increase asset buys if the outlook worsens - a topic already discussed in June when further rate cuts were ruled out.

Likewise don't expect fireworks when Britain's David Davis and the EU's Michel Barnier report back on the progress made during the first four-day negotiating block on Brexit later today.

“Constructive”, “polite” and “a good start” were typical descriptions of this first encounter, tinged with frustrations on both sides and continued profound disagreement on issues such as British payments and the role of EU courts after Brexit. This is all par for the course and no one expected any major breakthroughs. That said, as Barnier keeps on reminding everyone, the clock is ticking and three more such sessions are scheduled between now and October.

MARKETS

World markets have built up another head of steam, with major equity indices racking up new records again as the central bank scare of the past month recedes, inflation is missing in action, Q2 earnings growth looks to top 10 percent so far in the reporting season and even China growth has picked up pace as strong U.S. corporate earnings help lift the S&P 500 and the Nasdaq to record peaks – boosting world stocks to fresh highs and Asian shares to the highest in almost a decade.

The MSCI World index is now on track for its tenth straight daily gain – the longest winning streak since 10 straight gains in February 2015. There hasn't been a longer run than that since early 2003. With the BoJ adding to the party overnight by pushing back its inflation horizon and its policy trajectory as a result, all eyes now turn to Frankfurt.

The European Central Bank will leave interest rates and QE policy unchanged, but president Mario Draghi could sketch out how the central bank plans to gradually unwind its bond buying stimulus.

Three weeks ago in Sintra, Portugal, he indicated that the process of “normalising” monetary policy could come quicker than markets had expected. This rattled euro zone and world bond markets, so investors will be hanging on his every word today. Certainly, the euro zone economy is in its best shape for years – it’s growing faster than the United States, corporate profit growth is strong and the euro is its firmest in over a year over $1.15.

A firmer oil price has also helped stock markets, with Brent hovering just below $50 again. Sterling will eye the latest press conference on this week’s Brexit negotiations in Brussels later. European stocks are set to open higher.

Editing by Andrew Heavens

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