Markets
It doesn’t happen that much that European (November) PMIs have close to no impact on the euro or bond yields. The fact that they were mixed both in terms of sector (services fell from 55.9 to 53.3, manufacturing stabilized around 58) and across countries (Germany disappointed vs a stronger France) didn’t help. More importantly, it was the looming ECB meeting that kept investors to the sidelines. We retain that strains on supply chains eased somewhat, helping to revive factory production while also alleviating some of the upward pressures on inflation. Optimism about the year ahead in the European region nevertheless worsened with Omicron, rising cases and the reintroduction of restrictive measures hurting sentiment as well as posing the most important downside risks to growth going into 2022. Turning to the ECB meeting, the central bank officially announced the end of PEPP in March 2022 but keeps the programme dormant rather than remove it from the toolkit. It did extend the reinvestment horizon to the end of 2024. These reinvestments will be done in a much more flexible manner in terms of time, asset classes and jurisdictions to ensure easy finance conditions across the eurozone. Net buying under PEPP in 2022Q1 will be conducted under a lower pace than in the current quarter. From Q2 onwards, APP takes over at double the pace today (from €20bn/m to €40bn) before slowing down in Q3 (€30bn) and returning to the original €20 in Q4. This still-supportive monetary stance comes even as the ECB projects 5.1% growth for this year, 4.2% for 2022, 2.9% in 2023 and 1.6% for 2024. Inflation is seen (much) higher again, with forecasts of 2.6% (vs 2.2%) for 2021, 3.2% (vs 1.7%) next year and a convenient 1.8% for 2023 and 2024. Asked why the ECB is still committed for such a long time given the high uncertainty surrounding the forecasts, Lagarde said the path of bond purchases is actually the expression of that: still high to avoid a “brutal transition” but declining over time. She repeated that under current circumstances, it’s very unlikely that interest rates will be raised before 2023, referring to inflation expected below 2% further out the horizon. Lagarde did say the ECB will assess its stance on a quarterly basis in function of the economic developments and projections. Combined with high inflation forecasts and related upside risks, markets interpreted it as a first step towards normalization. EUR/USD rebounded north of 1.13(4) though still has some ground to recover before the first meaningful resistance around 1.15. German yields eased from their intraday highs during the press conference. The curve steepens with changes ranging from -1.6 bps (2y) to +5.2 bps (30y). The initial yield jump interestingly did not happen on the ECB statement, but on the BoE decision that took place a bit earlier. The central bank kicked off its tightening cycle with a 15 bps rate hike. The latest labour market and especially CPI (>5%) release this week were crucial ingredients. The central bank in its statement even suggested to increase the weight given to inflation in its assessment. A next rate hike as early as February (when new forecasts are available) is possible. EUR/GBP hit an intraday low of 0.846 on sterling strength but reversed part of the move after some euro appreciation following the ECB. UK gilt yields jump 4 to 6 bps across the curve.
News Headlines
The Swiss National Bank (SNB) today as expected maintained an accommodative monetary policy. The policy rate was kept unchanged at -0.75%. The Bank also reiterated that it can intervene in the FX market order to counter upward pressure on the Swiss franc if necessary. The Swiss economy will probably grow 3.5% this year and 3.0% next year and returned to a pre-corona level in Q3 of this year. Inflation in Switzerland also rose (1.5%), but remains below the 2.0% reference level. Inflation is also expected to remain below the target over the policy horizon (expected 0.6% in 2021, 1.0% for 2022 and 0.6% for 2023). The SNB maintains the view that the Swiss franc is highly valued. However, in remarks for the news conference, the SNB indicated that the real effective weighted exchange rate of the franc has little changed since the start of the pandemic due to the differences in inflation with other countries. The rise in the nominal exchange rate also helped to contain inflation. This analysis suggests that the SNB will keep a guarded approach on FX interventions, especially as long as it develops in a gradual manner.
