Fri, Sep 30, 2022 @ 07:05 GMT
HomeContributorsFundamental AnalysisWeekly Focus - The Inflation Fight Continues

Weekly Focus – The Inflation Fight Continues

The main event this week was the ECB’s decision to hike policy rates by 75bp highlighting that central banks are very much in inflation fighting mode despite the outlook for recession. ECB governor Christine Lagarde stressed though, that 75bp hikes is not the new norm but that the ECB needed to move further to a neutral rate. She emphasised the data dependency, but also a meeting-by-meeting approach to calibrate policy rates. She guided that at most five meetings with rate hikes were expected, including the ones we have just had. Our forecast remains another 50bp hike in October and 25bp hike in December but recognize the possibility of hikes continuing into next year.

Otherwise gas and electricity prices have taken centre stage this week following Russia’s continued closure of the NordStream 1 pipeline. Governments have scrambled to come up with measures to cap electricity bills, guarantee credit for utility companies in need of liquidity due to the price spike and power saving measures in the public sectors. EU energy ministers meet today to coordinate policies. In many cases the policies to mitigate the energy costs are not fully funded, which means fiscal policies are again being eased. This will all else equal require more monetary tightening to compensate for the fiscal easing in order to get inflation down. More hikes from European central banks are thus being priced sending bond yields higher again. Prices on gas and electricity have actually come down somewhat this week following focus on power saving measures and risk of a deeper economic downturn. Electricity prices are now down 35% from the peak in August.

Outside the gas and electricity space global price pressures are actually easing when it comes to goods inflation. Oil prices declined below USD90 per barrel this week (the lowest level since January) despite a cut in oil production by OPEC+ members of 100,000 barrels. Oil prices are now down 30% from the peak in March. Freight rates from Shanghai to Los Angeles dropped another 15% this week compared to last week and have taken back more than half of the sharp rise seen in 2020 and 2021. The decline in commodity and freight prices reflect weaker goods demand in US and Europe and with less pricing power amid weaker sales and high inventories, this should contribute to lower inflation in goods prices. However, in order to get service inflation down as well, more slack is needed in labour markets to bring down wage growth. Hence, central banks will need to keep tightening until they see clear signs that labour markets are turning.

China has seen some recurrence of covid outbreaks in some of its big cities with Chengdu entering lockdown and Shenzhen also implementing restrictions. So far it has had limited impact on supply chains but if it spreads to more cities on China’s east coast it may come. Equity markets have moved mostly sideways this week bringing a halt to the past weeks declines. EUR/USD hit a new cycle low below 0.99 on Tuesday but recovered following the ECB meeting. We still look for EUR/USD to trend lower over the next year.

Next week all eyes will be on US inflation, which is one of the last important data points before the Fed will decide on a 75bp or 50bp hike on their meeting in two weeks. US retail sales and the German ZEW index will give further clues to the outlook for recession.

Full report in PDF.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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