Financial markets consolidated ahead of the ECB meeting Wednesday. Sentiment improved as G-7 leaders pledged to support the Eurozone on overcoming the crisis, despite the lack of solid recommendations. As it gets tougher for Spain to access to public funding, there are reports saying that the country would apply for a precautionary credit line. Yet, it's been denied by the government. In the US, the better-than-expected ISM non-manufacturing index lent supports to the markets.
G-7 leaders showed concerns about the lingering sovereign debt crisis in the Eurozone and pledged to help Greece and Spain improve their public finance. After the conference call, the US Treasury stated that The G-7 ministers and governors reviewed developments in the global economy and financial markets and the policy response under consideration, including the progress towards financial and fiscal union in Europe. The focus is now turned to the upcoming G-20 summit on June 18/19. In Spain, despite the government's denial, speculations that the country would tap financial assistance from the EU/IMF intensified. Germany's Die Welt newspaper reported that the debt-laden country would receive a precautionary credit line from the European Financial Stability Facility (EFSF).
On the dataflow, the US ISM non-manufacturing index surprisingly rose +0.2points to 53.7 in May. This did help lifted market sentiment which was dampened by the disappointing May employment report. The Bank of Canada left the policy rate unchanged at 1% but the accompanying statement was not as dovish as anticipated. Policymakers acknowledged worsening in global economic outlook and increasing risks going forward. Yet, it retained the stance that the next move of the central bank would be a rate hike, rather than a cut. This should be attributed to the relatively stable domestic recovery. Concerning exchange rate, the BOC retained the rhetoric that persistent appreciation would be detrimental to growth despite the recent decline.
The ECB meeting will be held today and the focus will likely be on if/what the ECB would do to stem the spread of the sovereign debt crisis. On the monetary and non-standard monetary policy, the ECB is expected to stand on the sideline. Staff projections will likely be revised lower in terms of growth and inflation outlooks. The major task for the ECB is maintenance of price stability which has not been threatened, allowing more time for the central bank to gauge more changes in economic indicators for now. Moreover, the recently selloff in the single currency has delivered equivalent effects of monetary easing. That being said, the monetary statement would be more dovish than the May one.