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LGT Navigator: ECB takes up the fight against inflation

June 10, 2022

The European Central Bank (ECB) signaled a first interest rate hike in July to counter steadily rising inflationary pressures. ECB President Lagarde also held out the prospect of further interest rate steps, heralding the end of negative interest rates. The ECB is thus perhaps reacting too late and is now walking a tightrope between inflation and economic risks. As a result, the major stock indices fell and bond yields rose sharply. Today, the focus is now on the latest consumer price data in the US, before the Fed will make another interest rate move next week.

ECB takes up the fight against inflation

The ECB will raise key interest rates for the first time in eleven years at its next regular meeting on July 21. In doing so, the ECB sent a clear signal to take up the fight against (long underestimated) inflation. According to statements by central bank chief Christine Lagarde, a first interest rate step of 25 basis points can be assumed. A second rate hike is then likely to follow in September, which Lagarde said could also be more aggressive in line with inflation developments. The ECB also announced yesterday that it would end its multi-billion bond purchases on July 1. This was a prerequisite for a first interest rate step. The ECB's change of course did not go down well on Europe's stock markets in an initial reaction, causing losses of around -1.7%. The euro came under pressure despite the prospect of rising interest rates, while yields on European government bonds rose.

As before in Europe, stock indices came under pressure on the New York Stock Exchange, because the tighter monetary policy means the withdrawal of liquidity and increases fears of recession. The Dow Jones Industrial fell -1.94% to 32,272.79 points and the broad S&P 500 fell -2.38% to 4,017.82 points. Technology stocks on the Nasdaq came under even more pressure. The Nasdaq 100 posted a daily loss of -2.74%.

In Tokyo, the Nikkei 225 index follows the negative guidance from overseas and trades just -1.5% lower than the previous day. 

In the bond market, the yield of ten-year US government bonds remained well above the 3% mark and is quoted this morning at 3.05%. From the US reaches us this afternoon the latest data on the development of consumer prices. However, this should not change anything about the anticipated new interest rate step by the Federal Reserve for next week.

ECB forecasts significantly higher inflation, but weaker growth

In May, the inflation rate in the euro zone reached a new high of +8.1%. As a result, the ECB's latest inflation forecasts have all been revised upward. In the current year, the central bank now expects an average inflation rate of +6.8% – compared with the March forecast of +5.1% or the +3.2% still expected in December. In the following two years, the inflation rate should then slow down again to +3.5% (previously +2.1%) and in 2014 to +2.1% (+1.9%). At the same time, however, the ECB also revised its growth forecasts. The outlook is now for GDP growth in the euro zone of +2.8% this year (previously +3.7%) and +2.1% next year (previously +2.8%). For 2024, a growth rate of +2.1% (+1.6%) is forecast.

Stabilization in China's foreign trade?

Chinese exports rose by just under +17% in May on an annual basis, while imports increased by around +4%. Foreign trade in the world's second-largest economy thus appears to be recovering from the disruptions caused by the pandemic restrictions. In Shanghai, the country's main economic hub, a two-month lockdown ended last week. Chinese Vice Commerce Minister Wang Shouwen warned, however, that China's foreign trade remains burdened by a fragile global economic situation, high global inflation, and logistical bottlenecks within China.

Economic Indicators June 10

MEZ Country Indicator Last period
09:00 ESP Consumer Prices (May, y/y) +8.3%
10:00 IT Industrial Production (April, y/y) +3.0%
14:30 US Consumer Prices (May, m/m) +0.3%
14:30 US Consumer Prices (May, y/y) +8.3%
14:30 US Core Consumer Prices (May, y/y) +6.2%
16:00 US Consumer Sentiment (June) 58.4


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