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ECB Meeting Preview Summary (June 2017)

Core Content Overview

This document provides a preview of the ECB meeting in June 2017, analyzing the economic and financial market conditions in the Eurozone. It outlines key economic indicators, inflation trends, and market positioning, particularly in the context of monetary policy expectations and investment strategies.

Economic Growth and Inflation Trends

• Eurozone Growth: The Eurozone economy showed solid growth momentum in Q1 2017, growing above trend pace at 0.5% q/q. Leading indicators suggest continued firm recovery.
• Domestic Demand-Driven Recovery: The recovery is driven by a virtuous cycle between rising consumption, employment, and investment growth. Monetary policy has played a crucial role in supporting these trends.
• Inflation Outlook:
  • Headline inflation has increased since the end of 2016, mainly due to higher energy prices.
  • Core inflation remains subdued, with a year-over-year rate of 0.9% in May 2017, only marginally above its Q1 average.
  • ECB staff projections indicate that headline inflation will likely be revised downward, while core inflation is expected to remain stable.

Inflation Projections

Market Positioning and Strategies

• FX Market Positioning: The FX market is very long EUR, with a score of +25 on a +/-50 scale. This is the most extended long EUR position in six years.
• EURUSD Long Positions: EURUSD long positions have reached a six-year high, indicating strong market sentiment towards the euro.
• Investment Strategies:
  • Sell 5y OBL: Expected yield rise due to ECB tapering and rate normalization. The 5y part of the curve is likely to underperform.
  • EUR 2s5s Flattener: The EUR 2s5s curve is too steep; a beta-weighted flattener with a 2.25x1 DV01 is recommended.
  • 10s30s Flattener through OATs: Expected flattening pressure in the 10s30s curve due to rising 0-5y yields.
  • Eurozone Sovereigns: Long France and Italy flattener; 10y France is still relatively cheap compared to Germany and Spain.
  • BTP 2s5s Flattener: BTPs are expected to flatten if ECB remains dovish or if risk-off sentiment rises.

Key Market Indicators

• The LICI (Leading Indicator of Core Inflation) suggests a rise in core inflation pressures.
• The EUR 2s5s curve is steep, indicating potential for flattening if the ECB raises 2y swap yields.
• The EUR effective exchange rate has shown a 10bp overstepping, suggesting potential for correction.

Legal and Disclosure Information

• This document is a marketing communication, not investment research, and is not subject to independence requirements.
• It is intended for Relevant Persons and may not be suitable for all investors.
• BNP Paribas may have conflicts of interest and may engage in transactions that are inconsistent with the views expressed.
• The document contains performance data based on back-testing and simulations, which may not reflect actual market conditions.
• It is not a prospectus or an advertisement and does not constitute an offer to buy or sell securities.
• Options and ETFs mentioned are complex instruments and may not be suitable for all investors.
• Restricted securities may not be registered under US securities laws and are only available to Qualified Institutional Buyers.

Conclusion

The Eurozone economy is showing signs of continued recovery driven by domestic demand, but inflation remains subdued. The ECB is expected to maintain a cautious approach, avoiding a "taper tantrum" and focusing on gradual policy rate normalization. Market positioning suggests a strong long EUR bias, but potential for flattening in the yield curve and exchange rate is anticipated. Investors should be cautious and consider the risks and limitations associated with the strategies and data presented.