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LGT Navigator: ECB's Forward Guidance promises open money floodgates for longer

July 23, 2021

As expected, the European Central Bank has left its key interest rates at record lows and the total volume of the pandemic purchase program unchanged, but has adjusted its forward guidance, i.e. the direction of its monetary policy. Accordingly, the ECB will keep the money floodgates open for a longer period of time in view of the risk that the coronavirus delta variant will jeopardize the recovery in the euro area, and the turnaround in interest rates in Europe seems to have receded into the distance.

ECB's Forward Guidance promises open money floodgates for longer

The prospect of a continued expansionary monetary policy by the ECB supported the recovery on most European stock exchanges yesterday. The EuroStoxx 50 closed +0.8% higher at 4'059.05 points. The leading index for the eurozone gained more than three percent in the last three days, thus making the short-lived slump from the beginning of the week forgotten.

On Wall Street, the positive trend continued, although the momentum was lost somewhat, especially in the standard stocks. The Dow Jones Industrial managed at the end just a narrow daily plus of +0.07% and closed at 34'823.35 points. The broad S&P 500 also struggled and closed +0.2% higher at 4'367.48 points. A mood dampener was to be found in the worse-than-expected US labor market data. Thus, the initial claims for unemployment benefits rose by 51'000 applications last week, contrary to expectations of a decline. More momentum was shown by the technology exchange Nasdaq. Price gains by Facebook (+4.8%), Microsoft (+2.4%) or Amazon (+1.9%) drove the Nasdaq 100 by +0.66% to 14'940.17 points and thus back within reach of the record high.

While in Tokyo the stock exchange will be closed again today for a holiday, most stock indices in Asia trended slightly negative at the end of the week. Dominant continues to be the concern about the spread of the coronavirus delta variant in the often only sparsely vaccinated most populous continent. In China, the Shanghai Composite trades around -0.8% in the minus and the CSI 300 loses even -1.3% and in Hong Kong, the Hang Seng Index gives up about -1.1%.

ECB head Lagarde specifies symmetrical inflation target

The President of the European Central Bank (ECB), Christine Lagarde, made it clear that an initial rate hike is still a long way off. According to Lagarde, key interest rates will remain at the current level or lower until inflation stabilizes at 2% in the medium term. The inflation target is to be reached “well before the end, or at around the middle, of the projection period.” This means that under the new strategy – which promises more flexibility in achieving the inflation target – the ECB would have to forecast annual average inflation of 2% in the middle of the new projection horizon. The ECB last held out the prospect of an inflation rate of 1.5% and 1.4% for 2022 and 2023, respectively, in June. The central bank will then present its new projections in September. As the adjusted forward guidance explicitly implies that the inflation target can be exceeded, there is still the possibility that the ECB could even cut key rates further.

G20 environment ministers meeting to take climate protection a step further

After the leading G7 economic nations promised more climate protection at the top-level meeting in the UK in June, the focus is now on the G20 Environment Ministers' Meeting in Naples, which started yesterday. The meeting is in preparation for the G20 leaders' summit in Rome at the end of October. According to statements by US Climate Change Representative John Kerry, the path taken by the G7 countries in environmental and climate policy is to be continued in the G20 round. However, differences on climate policy are to be expected, Kerry warned.

Economic Indicators July 23

MEZ Country Indicator Last period
00:00 JP Holiday
08:00 UK Retail Sales (June, m/m) -1.4%
09:15 FR IHS Markit PMI Composite (July) 59.0
09:30 GE IHS Markit PMI Composite (July) 60.1
10:00 EZ IHS Markit PMI Composite (July) 59.5
10:30 UK IHS Markit PMI Composite (July) 62.2
12:30 RUS Bank of Russia Monetary Policy Decision
15:45 US IHS Markit PMI Composite (July) 63.7


Earnings Calender July 23

Country Company Period
SZ Schindler Q2
SZ Lonza H1
SZ BB Biotech Q2
FR Thales H1
SWE Volvo H1
DK Danske Bank Q2
UK Vodafone Q1 Sales
US American Express Q2
US Honeywell Q2


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Source: LGT Bank (Switzerland) Ltd.

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