ECB won't cut rates, EMs to suffer as US improves: Citi

The European Central Bank, in its policy meet today, will leave leave interest rates unchanged, believes Guillaume Menuet of Citi. The central bank will take into account the rebound in headline inflation and improvement in overall sentiment, but is unlikely to sound "significantly dovish."

The nonfarm payroll (jobs numbers) data from the US will be same as last month; around 165,000. Even if it is a modest recovery, the Federal Reserve can't continue purchasing assets at the same pace, he says. He expects emerging markets (EMs) to underperform as US economy recovers. Also read: ECB unlikely to help improve credit ratings Below is the edited transcript of his interview to CNBC-TV18. Q: We have got the European Central Bank (ECB) meeting, which is scheduled later today. What are your expectations from that? Is there any market moving that you are watching out for? A: ECB will announce that it is leaving its quantitative easing (QE), interest rates unchanged and as widely expected by the market. We have seen slightly better sentiment. We are seeing some modest rebounds in headline inflation. So, the ECB was vindicated that its scenario of a modest recovery in the second half of the year remains essential to be discussed. So it is unlikely that they will have significantly more dovish stance compared to what we had last month. What is happening in the US is a sign of better economic outlook. So, it is difficult to think that we are going to get a very dovish stance from Mr. Draghi here. Q: What about your expectations from the United States (US) nonfarm payroll numbers itself? Do you expect them to mirror the ADP numbers and thereafter how might risk assets behave? A: The consensus on the nonfarm payroll numbers is close to what we said last month around 165,000 or so. But if you look at the latest data and surveys out of the US there is a very modest recovery happening. It is a recovery nevertheless and the Fed reserve cannot continue purchasing assets at the same pace. Q: How are you reading the recent political developments taking place in Portugal? Do you see it escalating into something with wider consequences? A: It remains essentially Portugal centric at this stage. The political situation here is complicated. It illustrates people's appreciation of what austerity does when it is extremely forceful and maintained for a long period of time. Portugal's biggest problem is the lack of growth and fiscal adjustments. At least the way it was sold to voters was that at some stage they are going to recover. The structural reforms programmes and adjustments would deliver some employment. Clearly that has not been the case and therefore it is very difficult to think that we have a very constructive political situation out there. The problem with Portugal remains quite significant and if they were to be a second as far as resistance programme coming to Portugal, public sector investors would be asked to contribute. Q: What might be the impact on Emerging Markets (EMs)? Are you going to see a divergent performance with the US equities doing well as the central bank recognises the modest recovery? Will emerging market do badly as incremental money will not come? A: It is quite likely that EMs will probably underperform for quite a while. The monetary policy stance of the US, except that slight tightening in monetary policy, will have adverse consequences for EMs. It would need them to be mitigated to a certain degree either from a sort of capital inflows standpoint or simply from the change in the condition. What investors have done in the past is perhaps discounted too stable an interest rate environment. The degree of monetary policy accommodation remains quite substantial. But we are departing from a situation, which was excessively loose needing therefore some sort of repricing.