Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
At the start of this week, you’d have got decent odds on Christine Lagarde becoming the eurozone’s top central banker.
She certainly wasn’t seen as a front-runner to become the next president of the European Central Bank — Bundesbank president Jens Weidmann or Banque de France governor François Villeroy de Galhau were more likely candidates.
But when the dust finally cleared in Brussels yesterday, after days of tough negotiations between EU leaders, the head of the International Monetary Fund emerged as the chosen successor to Mario Draghi.
Lagarde’s nomination is part of a package that finally breaks male dominance of Europe’s top institutions, with Germany’s defence minister, Ursula von der Leyen nominated to head the European commission.
Women to head top EU institutions for first time
Investors are reacting to Lagarde’s nomination by piling into eurozone government bonds. They’re calculating that the ECB will continue offering easy money and record low interest rates on Lagarde’s watch, rather than tightening monetary policy soon.
This is driving bond prices to fresh highs, forcing down the interest rate (or yield) even lower.
Germany’s 10-year bond, for example, is now trading at a yield of nearly minus 0.4%! That means investors are paying for the privilege of holding the debt until it matures.
The German 10-year bond #yield at -0.39%! Sure, why not… pic.twitter.com/UOpZ6vqn4K
Lagarde will join the ECB at a crucial time (assuming MEPs approve her appointment). With growth weakening and inflation low, policymakers are already pondering what fresh stimulus measures are needed.
Lagarde has already reacted, saying:
“I am honored to have been nominated for the Presidency of the European Central Bank.
In light of this, and in consultation with the Ethics Committee of the IMF Executive Board, I have decided to temporarily relinquish my responsibilities as Managing Director of the IMF during the nomination period.”
I am honored to have been nominated for the @ECB Presidency. In light of this, and in consultation with the Ethics Committee of the IMF Executive Board, I have decided to temporarily relinquish my responsibilities as IMF Managing Director during the nomination period.
But, there’s already concern in the markets about Lagarde’s appointment. Although she’s run the IMF for several years, and also served as France’s finance minister, she is undoubtedly not a central banker. Before entering politics she served as a lawyer, not an economist.
Now, a legal background didn’t stop America’s Jerome Powell becoming head of the US Federal Reserve. Lagarde was also one of the key figures (for good or ill) through the eurozone crisis, so knows the challenges facing the ECB well.
But will she provide the same leadership as Draghi, who famously saved the euro in 2012 with a ground-breaking stimulus programme, in the face of firm opposition from hawkish colleagues.
Investors may question whether Lagarde can be trusted to do “whatever it takes” when the next crisis comes…..
Also coming up today
New PMI surveys from Markit will show how the world’s service sector companies fared last month.
With manufacturing struggling, and global trade under pressure, services is doing a lot of heavy lifting for the global economy. Eurozone and US services firms will probably report slower growth, while the UK could be lacklustre.
We also get a flurry of US data, ahead of tomorrow’s 4th July celebrations.