Market Analysis
September 14, 2023

ECB rate hike But makes EUR weak!

This rate hike, is the tenth consecutive policy rate hike since July last year, hiking all interest rates by 25bp and the rate is 4.5 right now. Higher inflation and inflation forecasts look like the main drivers of the hike. The ECB’s communication is clear: today was the last hike in the current cycle

This announcement could potentially lead to some market reactions. Traders, accustomed to these consecutive rate hikes, may view this as the end of the cycle. Consequently, the EUR currency might experience a weakening effect. As a result, it is important for market participants to adjust their strategies accordingly, considering the implications of this final rate hike by the ECB.

The European Central Bank (ECB) decided to raise interest rates for the tenth consecutive time since last July. This move was driven by a greater concern about the fear of not fully controlling inflation and the risk of ending the rate hikes too soon, rather than the increasing risk of recession in the eurozone. Following a total increase of 450 basis points, the ECB’s main policy rates are now at a historic high.

More insights into the reasons behind this decision and the discussions that took place will be shared during the press conference, scheduled to begin at 2:45 pm CET. At the moment, it is evident that the ECB is deeply troubled by inflation. This includes both the current inflation rate and the anticipated future inflation, as indicated by the latest ECB staff projections, which foresee headline inflation reaching 3.2% in 2024.

You might be wondering why the ECB isn’t taking a step back and waiting to assess the full impact of the previous rate hikes. The answer is straightforward: it’s about maintaining credibility. The ECB’s primary responsibility is to ensure price stability, which the eurozone has not experienced for nearly three years. While the recent surge in inflation is primarily influenced by factors beyond the ECB’s direct control, the ECB must demonstrate its commitment to curbing it. The potential consequences, such as a more pronounced economic slowdown in the eurozone, are of lesser concern to the ECB, at least for now.

Looking ahead, if the economy weakens further and a disinflationary trend gains momentum, it will become increasingly challenging to justify additional rate hikes before the year’s end. The official communication’s statement that “based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target” suggests that today’s rate hike may well be the final one.

In summary, today’s interest rate hike not only bolsters the ECB’s credibility but also signals the end of the current rate-hiking cycle.

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Ali Sabbaghi
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Eurozone EUR
News
April 11, 2023

Eurozone retail sales decrease again in February despite upbeat surveys

Retail sales in February continued to decline, which makes it unlikely for a positive contribution to first quarter GDP. This suggests that there may be weakness in the economy and no strong rebound in growth is expected.

Retail trade volume down by 0.8% in the euro area and by 0.9% in the EU

Retail sales volume has declined since peaking above pre-pandemic levels and has fallen to levels well below. The decline accelerated in 2022 and there is no break from the trend yet. The spike in the value of retail sales last year due to inflation has now plateaued.

Sales figures for February were disappointing in all five major markets, with Germany and France experiencing the biggest drops of -1.3% and -1.5% respectively. This suggests that consumers are still struggling with high inflation and an uncertain economic future, despite a slight improvement in confidence levels. Although there has been a slight uplift in consumer sentiment, it remains at levels typically associated with an economic recession.

Although surveys such as PMI and Ifo showed a positive outlook for the economy in the first quarter, there has been no concrete evidence from actual sales data to support this. Unless there is a significant increase in March, retail sales are likely to decrease in the first quarter. However, it is important to note that retail sales may not accurately reflect the state of the economy as services have been performing well and there is a potential for increased production activity. Despite this, the current retail sales figures do not suggest a strong economic recovery.

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Ali Sabbaghi
0
News
April 5, 2023

German industrial orders surged in February

Industrial orders have now rebounded sharply since November, brightening the outlook for German industry. However, the US slowdown and the longer-term fallout from recent financial turmoil, as well as the broader impact of monetary policy tightening, could still spoil the party

German industrial orders surged in February, brightening the outlook for German industry. Industrial orders increased by 4.8% month-on-month, from 0.5% MoM in January. On the year, orders are still down by almost 6%. After the sharp fall since last summer, industrial orders have recovered in recent months. Compared with November last year, industrial orders have increased by more than 7%.

These strong industrial orders data fuel recent optimism in German industry. Interestingly, production expectations had just started to weaken again after the initial enthusiasm over the Chinese reopening at the start of the year. Looking ahead, the outlook for German industry has clearly brightened, even if the high inventory build-up since last summer is still likely to weigh on production in the short run. Beyond the short term, however, the question will be whether today’s boost in new orders is the start of an industrial revival or whether the expected slowdown of the US economy, the fallout from recent financial market turmoil and the broader impact of monetary policy tightening will spoil the party again.

source: ING

Ali Sabbaghi
0
Europ, EUR
Headlines
April 2, 2023

Europ plans to make it easier for mid-market banks to lose liquidity

Europ plans to make it easier for mid-market banks to lose liquidity

Liquidity reduction is an approach that can be used for orderly withdrawal from trading activities and to prevent risks to financial stability, and the lack of this credible plan can jeopardize the validity and feasibility of the resolution strategy of any bank that has significant trading books.

Ali Sabbaghi
0
Market Analysis
March 31, 2023

France: Inflation falls, but not by much, and consumption drops

Inflation decreased in France in March, thanks to base effects on energy prices. Nevertheless, underlying inflationary pressures remain very high and food inflation will continue to rise. GDP growth will therefore likely remain weak, as confirmed by the falling consumer consumption in February

Inflation falls, thanks to energy

As expected, headline inflation in France fell in March to 5.6% from 6.3% in February. The harmonised index, which is important for the European Central Bank, stands at 6.6% against 7.3% last month. This fall in inflation is mainly due to the base effects of energy prices, which rose in March last year when the war in Ukraine started. Energy inflation thus stood at 4.9% in March compared to 14.1% in February. Given the tariff ‘shield,’ which limited the increase in gas and electricity prices in France to 4% in 2022 and 15% in 2023, energy continued to contribute positively to French inflation, unlike in other European countries which saw energy bills fall in 2023 after the very sharp rise in 2022.

In addition, the government’s decision to raise tobacco prices pushed these prices up by 7.8% year-on-year in March (compared to +0.2% in February). Food inflation also continues to rise, by 15.8% year-on-year in March, compared to 14.8% in February. Food is now by far the largest contributor to inflation in France. At the same time, inflation in manufactured goods rose from 4.7% to 4.8%.

Despite the fall in headline inflation, underlying inflationary pressures remain very high. Consumer prices rose by 0.8% over one month in March, which is well above historical averages. The only positive element is the slight drop in services inflation, from 3% to 2.9% in March, due in particular to the fall in transport services prices, which indicates that the increases in the minimum wage have not led to a sharp rise in the prices of all services, so far. Transport also benefits from lower fuel prices.

What is the outlook for inflation?

In the coming months, food inflation is expected to remain the largest contributor to consumer price inflation in France. Despite the fall in world food commodity prices, food inflation will probably continue to rise in the short run. Indeed, the cost increases of recent months will continue to be reflected in food prices, as evidenced by the recent trade negotiations, which will lead to an increase in prices paid by supermarkets to their suppliers of around 10%. However, the impact of these negotiations is not expected to be immediate on prices but gradual during the second quarter of 2023.

Producer prices remain dynamic in industry, rising by 13% year-on-year in February compared to 14.5% in January, but are decelerating. This implies that inflationary pressures for manufactured goods will start to ease in the coming months. In addition, survey data for March indicates that fewer firms are expecting higher prices. Although price expectations remain historically high, they have started to decline in all sectors. Assuming that energy prices remain lower than in 2022, headline inflation is expected to average 5% in 2023 (5.9% for the harmonised index), with a marked decline from the end of the summer. Nevertheless, inflation should end the year above 3%.

Consumption declines

This expected decline in inflation is taking place against a background of slowing global demand, and growth, expected in France in 2023. The data on household consumption of goods for the month of February, published this morning by INSEE, confirms this once again. Consumer spending fell by 0.8% in volume over the month, following a 1.7% rise in January – a rise that was truncated by statistical effects linked to the disappearance of the energy voucher. Consumption is down in all product categories, and the drop is particularly strong in food (-1.2% over the month). Though services consumption probably held up better, household consumption will probably not be a strong driver of economic growth in the first quarter. We expect quarterly growth to be 0.1%, and the risks are tilted to the downside, particularly in view of the social unrest in March, which may have had a temporary negative impact on activity. Growth is not expected to be much more dynamic for the rest of the year, with activity hampered by rising interest rates, slow global growth, and the inflationary environment. We expect GDP growth to be weak at 0.7% for 2023 as a whole, and 0.7% in 2024 (down from 2.6% in 2022).

source: ING

Ali Sabbaghi
0
German inflation
News
March 30, 2023

German inflation drops but there’s no sign of broader downward trends

German headline inflation dropped in March to the lowest level since last summer. However, there are still no signs of any broader disinflationary trend outside energy and commodity prices

Has the disinflationary process started? We don’t think so. German March headline inflation came in at 7.4% Year-on-Year, from 8.7% YoY in February. The HICP measure came in at 7.8% YoY, from 9.3% in February. The sharp drop in headline inflation is mainly the result of negative base effects from energy prices, which surged in March last year when the war in Ukraine started. Underlying inflationary pressures, however, remain high and the fact that the month-on-month change in headline inflation was clearly above historical averages for March, there are no reasons to cheer. 

No signs of broader disinflationary process, yet

Today’s sharp drop in headline inflation will support all those who have always been advocating that the inflation surge in the entire eurozone is mainly a long but transitory energy price shock. If you believe this argument, today’s drop in headline inflation is the start of a longer disinflationary trend. As much as we sympathised with this view one or two years ago, inflation has, in the meantime, also become a demand-side issue, which has spread across the entire economy. The pass-through of higher input prices, though cooling in recent months, is still in full swing. Widening profit margins and wage increases are also fueling underlying inflationary pressure, not only in Germany but in the entire eurozone.

Available German regional components suggest that core inflation remains high. While energy price inflation continued to come down and was even negative for heating oil and fuel, food price inflation continued to increase. Inflation in most other components remained broadly unchanged. Given that energy consumption is more sensitive to price changes than food consumption, it currently makes more sense for the European Central Bank to only look at headline inflation that excludes energy but includes food prices when assessing underlying inflationary pressure.

All this means is that just looking at the headline number is currently misleading; there are still few if any signs of any disinflationary process outside of energy and commodity prices.

Headline inflation to come down further but core will remain high

Looking ahead, let’s not forget that inflation data in Germany and many other European countries this year will be surrounded by more statistical noise than usual, making it harder for the ECB to take this data at face value. Government intervention and interference, whether that’s temporary or permanent or has taken place this year or last, will blur the picture. In Germany, for example, the Bundesbank estimated that energy price caps and cheap public transportation tickets will lower average German inflation by 1.5 percentage points this year. And there is more. Negative base effects from last year’s energy relief package for the summer months should automatically push up headline inflation between June and August.

Beyond that statistical noise, the German and European inflation outlook is highly affected by two opposing drivers. Lower-than-expected energy prices due to the warm winter weather could are likely to push down headline inflation faster than recent forecasts suggest. On the other hand, there is still significant pipeline pressure stemming from energy and commodity inflation pass-through and increasingly widening corporate profit margins and higher wages.

Even if the pass-through slows down, core inflation will remain stubbornly high this year.

ECB has entered final phase of tightening

As long as the current banking crisis remains contained, the ECB will stick to the widely communicated distinction between using interest rates in the fight against inflation and liquidity measures plus other tools to tackle any financial instability. The fact that there are still no signs of any disinflationary process, discounting energy and commodity prices, as well as the fact that inflation has increasingly become demand-driven, will keep the ECB in tightening mode.

The turmoil of the last few weeks has been a clear reminder for the ECB that hiking interest rates, and particularly the most aggressive tightening cycle since the start of monetary union, comes at a cost. In fact, with any further rate hike, the risk that something breaks increases. This is why we expect the ECB to tread more carefully in the coming months. In fact, the ECB has probably already entered the final phase of its tightening cycle. It’s a phase that will be characterised by a genuine meeting-by-meeting approach and a slowdown in the pace, size and number of any further rate hikes.

We’re sticking to our view that the ECB will hike twice more – by 25bp each before the summer – and then move to a longer wait-and-see stance.

source: ING

Ali Sabbaghi
0
German Eurozone
News
March 29, 2023

German Ifo continues upward trend

Another improvement in sentiment in the German economy as the Ifo index increased for the sixth month in a row in March. However, we fear that the latest financial turmoil will reach the real economy in the coming months.

In March, Germany’s most prominent leading indicator, the Ifo index, increased for the sixth month in a row, coming in at 93.3 from 91.1 in February. Lower wholesale gas prices and the reopening of the Chinese economy have boosted economic confidence. Both the current assessment and expectations component increased significantly.

Divergence between financial markets and real economy

The financial market turmoil of the last few weeks has not yet affected economic sentiment – at least not economic sentiment measured by company surveys. The latest economic sentiment indicators nicely illustrate that for now, financial market turmoil appears to be ringfenced and has not affected the real economy: while the ZEW index, filled in by financial analysts, dropped, PMIs and now the Ifo index increased. We are more careful, however, and remind everyone that the Ifo index can react with a delay of one to two months to unexpected events and financial market turmoil can clearly affect the real economy over time.

The German economy will continue its flirtation with recession. But what is more important: the ongoing war in Ukraine, ongoing structural changes, an ongoing energy transition and the impact of the most aggressive monetary policy tightening in decades are the main drivers of what looks like subdued growth for a longer while.

source: ING

Ali Sabbaghi
0
Market Analysis
March 23, 2023

FED raised interest rates by 0.25%, now it’s the Bank of England’s turn

The Federal Reserve raised interest rates by 0.25%, much of which was priced in. But Federal Reserve Chairman Powell signaled that there would be another 0.25% hike before this contractionary cycle ends, which was a hawkish tone. but, there is not even a certainty that there will be another interest rate hike or not. because Fed policy no longer depends on inflation and all banking stress and crisis available too. As Powell put it, “adequate credit enhancement from bank problems” somehow “substitutes for rate hikes.”

And uncertainty about the credit crunch adds to the confusion about the Fed’s policy

Now it is the turn of Europe and England

After the Fed meeting and Powell’s speech, European Central Bank President Lagarde reiterated that the ECB will maintain a “strong” approach to responding to inflationary risks and that the 2% inflation target is non-negotiable.

This year we see a hawkish European Central Bank and a weakened American Central Bank. The easing of the US Federal Reserve and the hawkishness of the European Central Bank could have increased the expectations that EURUSD could continue its possible growth above the 1.10 range. The 1.1275 range is currently considered a logical target for buyers.

In the case of England, the high inflation shocked everyone and the new inflation report destroyed the predictions of Billy, the head of the Bank of England, that “we will see a sharp drop in inflation”.

Due to the fact that inflation will not decrease on its own, it is almost certain that the Bank of England will increase the interest rate by 0.25% in today’s meeting and we can see higher prices for all GBP pairs.

Ali Sabbaghi
0
EUR ECB
Market Analysis
March 20, 2023

EUR roadmap for this week

The European Central Bank took a less hawkish approach to its interest rate hike cycle at its March meeting compared to its February meeting.
As a result, interest rate markets now expect the European Central Bank to not raise interest rates again.
Due to the hawkish policies of Europe, there will be a strong focus on future growth and inflation data. Because it will form the market’s expectations about whether the interest rate increase will be done or whether it can be implemented.
This means that the focus for the euro this week will be on Friday’s Manufacturing and Services PMI. But due to the inverse correlation of the euro with the US dollar index, the Fed’s policy decision on Wednesday could clear the way for euro traders.

Ali Sabbaghi
0

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