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ECB signals rate hikes from July

Khatija Haque - Head of Research & Chief Economist
Published Date: 10 June 2022

 

  • The ECB signalled that it would raise its benchmark rates by 25bp in July, as expected, and left the way open for a bigger increase in September “if the medium-term inflation outlook persists or deteriorates”. This would mark the first interest rate increase in the Eurozone in more than a decade, as inflation has exceeded expectations. The ECB now expects inflation to exceed 7% on average this year, up from 5.1% in March before easing to 3.5% next year and 2.1% in 2024.  The growth forecast for 2022 was revised lower to 2.8% from 3.7% and 2.1% (previously 2.8%) in 2023. The ECB confirmed it would end asset purchases at the end of this month, which was also expected by the market. 
  • Inflation in China came in slightly lower than forecast in May at 2.1% y/y, unchanged from April. Food prices rose 2.3% y/y while transport & communications prices jumped 6.2% y/y last month.  Producer inflation slowed to 6.4% y/y last month from 8.0% in April as global commodity prices eased somewhat.  Trade data for May released yesterday showed a bigger than expected rise in the trade surplus as exports surged 16.9% y/y while import growth was just 4.1% y/y.
  • Egypt’s headline CPI inflation rate rose to 13.5% in May, up from 13.1% the previous month. This was the fastest pace of annual price growth since May 2019 although on a m/m basis headline inflation slowed to 1.1% in May from 3.3% in April.
  • The focus for markets today is US inflation data for May, which is expected to remain elevated at 8.3% y/y on high energy prices. Core inflation is expected to moderate to 5.9% y/y from 6.2% in April.  The flash University of Michigan Consumer Sentiment index will also be released today and will be closely watched.  

Key economic data and events today

16:30 US CPI (May) forecast 8.3% y/y

18:00 US University of Michigan sentiment (Jun) forecast 58.1

Fixed Income

  • Bond markets were led by the European Central Bank overnight with a hawkish commitment to damping down inflation affecting the Eurozone economy. Plans to end asset purchases by the start of July and to potentially hike by as much as 75bps by the end of September helped to sink bund markets. The 2yr Schatz yield jumped almost 14bps to 0.814% while the 10yr bund yield gained 7bps to close at 1.422%. Spreads over German bonds jumped with Italian 10yr yields 15bps over bunds.
  • Movements in US markets were relatively more contained in the run up to next week’s FOMC. The 2yr yield added almost 4bps to close at 2.8113% while the 10yr rose by 2bps to 3.0418%.

FX

  • Currency markets appeared underwhelmed that the ECB wasn’t taking more immediate action to fight against inflation and after an initial pop higher, EURUSD settled down by 0.9% to 1.0617. Sterling fared little better, falling by 0.35% to 1.2493 while USDJPY pushed higher still to 134.36.
  • Commodity currencies fell heavily, with USDCAD moving up 1.1% against the loonie to 1.2699. AUDUSD fell by 1.3% to 0.7098 and NZDUSD dropped by almost 1% to 0.6386.

Equities

  • Equity markets took a tumble yesterday as concerns about the upcoming inflation print from the US returned to the fore. The NASDAQ dropped -2.8%, while the S&P 500 lost -2.4% and the Dow Jones -1.9%.
  • In Europe, the DAX was the notable loser as that lost -1.7%, but the FTSE 100 (1.5%) and the CAC (-1.4%) were not far behind.
  • Locally, the DFM and the ADX both dropped -0.7% while the Tadawul managed to close 0.1% higher.

Commodities

  • News that parts of Shanghai will need to go back into lockdown have shaken oil markets somewhat. Oil prices settled lower overnight with Brent down 0.4% to 123.07/b and WTI down by 0.49% to 121.51/b.
  • Iran has asked the IAEA to suspend monitoring of its nuclear sites, threatening the viability of negotiations to restore the JCPOA.

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