The euro slides to new 20-year lows against the dollar: the single European currency reached $ 0.9809, a level not seen since December 2002, before recovering to 0.9864. The new three-quarter point hike decided yesterday by the Fed and expectations of subsequent hikes weigh heavily. The European currency is suffering from the economic impact of the war and the energy crisis.
The ECB, after the three-quarter point tightening at the beginning of September, “expects to further raise interest rates in upcoming meetings to curb demand and protect against the risk of a persistent increase in inflation expectations”which “is likely to remain above target for an extended period of time.”
It can be read in the Economic Bulletin of the Central Bank which recalls inflation at 9.1% in August and the upward revision of the projections of the experts to 8.1% in 2022, 5.5 in 2023 and 2.3. in 2024. “After the recovery observed in the first half of 2022, recent data indicate a considerable slowdown in growth in the euro area, with the economy expected to stagnate later in the year and in the first quarter of 2023”. It can be read in the Economic Bulletin of the European Central Bank, which he notes the fall in the SME services index in August “which indicates a stagnation in activity”.
According to the ECB, “there are clear signs of a protracted slowdown in economic activity in a context of high inflation and persistent uncertainty linked to the war in Ukraine and energy-related trends”. “Indicators from the markets suggest that, in the short term, oil prices will fall, while wholesale gas prices will remain at extraordinarily high levels.” “The inflation of food goods – it continues – grew significantly, from 9.8 to 10.6% between July and August, driven upwards by the world prices of food raw materials and by the increase in their producer prices in euro area “.
“In light of the deteriorating economic outlook and current inflationary pressures, it is likely that the resilience of firms will also depend on the continued support provided by economic policies, in particular that offered by the budgetary authorities”. The ECB, however, encourages a reversal of the trend with respect to the ‘rain’ support of the pandemic. “Budget support measures aimed at cushioning the impact of energy price increases should be temporary and targeted at the most vulnerable households and businesses, so as to limit the risk of fueling inflationary pressures, improve the efficiency of public spending and preserve debt sustainability “.
Markets are betting on 225 basis points of further monetary tightening by June, with the deposit rate set by the ECB which would thus reach 3% from the current 0.75%. Bloomberg writes on the basis of data obtained by cross-referencing the swap contracts with the dates of the next meetings of the central bank’s Governing Council. The drastic increase in the tightening expected by the markets – the ECB is officially discussing whether the “terminal” rate where the ECB intends to stop should be 2% or not – follows the Fed’s decision yesterday to raise another 75 basis points. Expectations of further gas prices also weigh heavily after the escalation of the war in Ukraine announced by Putin. Debt sustainability “depends on economic growth” and “a significant role is played by the Next Generation Eu. It is very important that the growth projects financed through this program are consistently pursued and fully implemented”. This is said by Isabel Schnabel, a member of the Executive Committee of the ECB, in response to a question about Italy’s high debt. Asked by the German newspaper T-online, Schnabel responds to a question about the political rise of the far right in Italy with FdI leader Giorgia Meloni: “we never comment on political developments in individual countries”.
And after eight years, Switzerland says goodbye to negative rates. The central bank has decided on a maxi hike of 0.75 points (however lower than some forecasts that bet on 100 points) bringing the rate to 0.5%. And according to President Thomas Jordan, further increases in the coming months are not excluded. The move by the SNB is in line with the general rate hike in the world led by the Federal Reserve with the ECB accelerating the hikes, leaving the Bank of Japan alone with negative rates.
The main European stock exchanges appear weak pending the launch of US stock markets, after an initial shock, following the 75 basis point increase in Fed rates. Positive US futures after the lower-than-estimated rise in jobless claims and pending the confidence of EU consumers. In the Old Continent, the best is Milan (+ 0.4%), followed by London (-0.05%) just below par. Weak Madrid (-0.25%), more evident the drop in Paris and Frankfurt (-0.5% both). And after a weak opening, Wall Street turns negative. The Dow Jones loses 0.40% to 30,066.86 points, the Nasdaq drops 0.83% to 11,126.11 points while the S&P 500 drops 0.59% to 3,765.59 points.