Source: AFP
Source: AFP
The European Central Bank (ECB) will face a worsening outlook for the Eurozone when its Governing Council meets on October 27.
Source: Bank of Singapore, Bloomberg
Firstly, the energy shock from the war in Ukraine has raised inflation to a new record high of 10.0% in September as the chart above shows. Even when stripping out food and energy costs, core inflation is running at 4.8%, far above the ECB’s 2% target, and the latest data show consumer price rises are broadening across the Eurozone.
Secondly, the energy shock is causing recession. Purchasing manager indices (PMIs) - timely surveys of business sentiment - have fallen below their key 50.0 level since July, indicating firms have seen activity contracting in Q3’22.
Source: Bank of Singapore, Bloomberg
Lastly, financial conditions have tightened sharply with bond yields surging. The chart above shows 10Y German bund yields have jumped over 2.00%, stressing the Eurozone’s broader financial system as the last chart below shows.
Source: Bank of Singapore, Bloomberg
To curb inflation, we expect the ECB will hike its deposit rate by 75bps again this month, by 50bps in December and by 25bps in February to reach a peak of 2.25%. But after that, recession and rising financial stress are set to force the ECB to stop raising rates just as the 2008 financial crisis and 2011-12 Eurozone debt crisis did as the last chart shows. This will leave the ECB’s key interest rate well below the Federal Reserve’s. We thus remain EUR bears, forecasting a further fall to 0.95 against the USD over the next three months.
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