The energy crisis in Europe and inflation developments continue to be a key market focus. The EU commission this week introduced a number of proposals to mitigate the impact of the energy crisis. The commission proposed to limit electricity demands by 5% in peak hours and introduce a windfall tax that to help fund shielding of consumers by raising EUR140bn for the member states. The cap is set at EUR 180 MWh of realized revenue. See full EU plan here. Finally, European Commission President Ursula von der Leyen said that a tax force will be set up with Norway to look at the high gas prices. Many EU countries are now coming up with proposals on how to help consumers. France announced that it will limit gas and electricity price hikes next year to 15% and in Denmark the government proposed a government guaranteed loan scheme allowing consumers to postpone the extra bill for up to five years. The budgetary impact in Denmark is small and in France the government says that a major part of the costs will be covered by the introduction of windfall taxes. While the measures will help hold a hand under economies, it may prolong inflation pressures and hence demand more tightening from the ECB.
Higher than expected US inflation numbers shocked markets this week as they dented hopes for a “softer” Fed. The US August CPI surprised clearly to the upside, as headline CPI rose only 0.1% m/m due to the lower gasoline prices, but core inflation clearly outpaced expectations at 0.6% m/m (July +0.3%, consensus +0.3%). Importantly, inflation pressures remain broad-based with both core goods and services inflation picking up. The inflation release underscored that the Fed cannot take the “foot off the brake” anytime soon. The Fed cannot afford to signal a ‘pivot’ anytime soon, which is also underlying our belief that it will hike by 75bp next week, while financial markets are even pricing a 30% chance of a 100bp hike. The fear of a more aggressive Fed led to a large sell-off in equity markets, especially in the interest rate sensitive tech sector, where the NASDAQ fell by the most in two years as yields moved higher, while the EUR/USD dropped below parity again.
Ukraine made important advances in the Eastern part of the country, raising the hope the war can come to an end. While we keep our scenario of a frozen conflict in the short term, the odds for Ukraine winning the war have increased. We do not expect sanctions relief but instead highlight that businesses should start to envision opportunities arising from Ukraine reconstruction and recovery. For more details and our updated scenarios see Research Russia-Ukraine: The underdog has the upper hand now – what’s next?, 12 sept.
Apart from the FED on Wednesday next week, we have a long list of other central banks that meet. On Tuesday, we expect the Riksbanken to hike its policy rate by 75bp, while on Thursday, we expect the BoJ to confirm its commitment to the yield curve control, while the market expects Norges Bank to deliver another 50bp hike. Also on Thursday, we expect the Bank of England to hike by 50bp and the Swiss National Bank to hike by 75bp. In Europe, announcement on fiscal help packages relating to the energy crisis is a key focus area. On the data front, we get consumer confidence in the euro area on Thursday, while the PMIs on both side of Atlantic on Friday could be another gloomy report for Europe, while the outlook is more uncertain for the US given the ISM continues to lie at a much higher level.