Mon, May 29, 2023 @ 06:24 GMT
HomeContributorsFundamental AnalysisWeekly Focus - Is the Market Starting to Believe the ECB?

Weekly Focus – Is the Market Starting to Believe the ECB?

Expectations of increasing monetary policy divergence between the Federal Reserve and the ECB drove the markets this week. Rate markets pushed back expectations of the first ECB rate hike from 2022 to 2023 after both ECB Lagarde and Schnabel said that conditions for rate increases next year would be very unlikely to be met. On the back of these comments, EUR/USD hit a 16-month low and briefly dipped below 1.13. The US-DE 10-year spread has widened by 20 basis points in November. Long-term market-based inflation expectations have stabilised just below 2% in euro area and in the range of 2.5-2.6% in the US for now. We expect euro area inflation to remain above the ECB’s target until H2 22, but fall back to a 1.5-1.7% range thereafter, see our Euro Area Research: Measuring the euro area inflation pulse,15 November.

Equity markets maintained a good spirit this week, supported by evidence that the global consumer is holding up strong. Chinese retail sales surprised on the upside on Monday with 4.9% annual growth (cons. 3.7%). After a string of worse-than-expected figures, this gave some investor relief. On Tuesday, the US (nominal) retail sales rose 1.7% in October and even when factoring in some increase in prices, this was a surprise. The strong retail sales are a reflection that the pandemic is still having an effect on consumer dynamics, as it equally indicates that goods demand remains elevated while service consumption is subdued versus pre-pandemic trends. Overall, resilience in goods consumption implies no near-term relief for global supply chain bottlenecks (longer delivery times and elevated freight rates) while it does provide some relief to fears of the global growth slowing down.

Consumption-related indicators will remain in focus next week. Euro area consumer confidence data for November will be released on Monday and it will be interesting to see whether we see a decline similar as in the US in light of high inflation pressures. So far consumer confidence has been quite resilient, still standing above pre-pandemic levels. We also get the German consumer confidence data on Thursday. In the US, the most important release is the PCE data on Wednesday. The inflation part of it is not so interesting given we already got CPI statistics two weeks ago. Instead, the monthly private consumption data is the one to watch. Considering the strong retail sales data, we could expect goods consumption to remain elevated. Also, watch out for the flash PMIs from euro area, UK and the US on Tuesday. Recently, the gap between US and euro area economic surprise indices has been growing with data releases from the US often surprising to the upside. Negative data surprises from the euro area could add further pressure on EUR/USD.

On the central bank front, we keep an eye on the FOMC minutes on Wednesday and the ECB minutes on Thursday. Several FOMC policymakers have spoken since the November meeting so we expect this to be a non-event for markets. For ECB, the focus will be on the inflation debate in the Governing Council and on any indications why Lagarde at the time was not willing to push back more on the aggressive market pricing on the short-end. Lastly, the Reserve Bank of New Zealand will meet early Wednesday morning, and consensus is looking for a 25bp hike.

Full report in PDF.

Danske Bank
Danske Bank
This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets´ research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S, which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (©) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Featured Analysis

Learn Forex Trading