Ahead Of Central Bank Meetings, Politics Dominates

The US dollar is trading within its pre-weekend range against the major currencies as participants await the central bank meeting starting in the middle of the week. The Federal Reserve, Bank of England, and the Bank of Japan meet. Only the Fed is expected to hike rates, but given the disappointing growth and softening of the preferred core PCE deflator (February through April), there is talk of a dovish hike.  

Meanwhile, politics is front and central. UK Prime Minister May announced a cabinet reshuffle over the weekend that gave two of her former rivals (Gove and Leadsom) join the cabinet, while she lost two of her close advisers. She faces the back-benchers in Parliament today. There is great uncertainty whether May survives as Prime Minister, but it is not clear either who would replace her and if they have greater support about the Tory base. Brexit negotiation was to begin shortly, and it is not clear if they will go forward and if and how the newly chastened government’s position will be modified.  

In France, Macron’s new party (Republic on the Move) appears to have won a little more than 31% of the vote, suggesting that in the second round it can secure 415-455 seats in the 577-seat parliament. It polled about 10% more than the center-right Republicans, the party from which the Prime Minister hails. The Socialists were decimated. It will likely see the number of seats it controls fall to 20-30 from 331. Marring the results a little was the extremely low turnout. Nevertheless, Macron efforts to reshape French politics and economics took a step forward. His signature program is labor market reforms, which seek to break the tradition of industry-wide settlements, will go full steam ahead. Macron wants the measures ready before the end of the quarter.

There were two political surprises over the weekend. First, Italy had local elections in around 1000 cities in the last flurry ahead of the national elections, which must be held by next spring. There had been some movement toward elections later this year, but the political compromise between the four largest parties unraveled last week. Hobbled by internal strife, the Five Start Movement (M5S) did particularly poorly, leaving it in a weak position to compete in the second round on June 25. Investors responded positively to the electoral developments. Italy’s 10-year bond yield is off six-seven basis points to bring the one week decline to 25 bp, and near 2%, it is near the lows for the year. Its premium over Germany has narrowed 20 bp over the past week. The premium over Spain has narrowed 10 bp at the same time.  

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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