HomeContributorsFundamental AnalysisA 25 bps ECB Rate Hike Today is Our Preferred Scenario

A 25 bps ECB Rate Hike Today is Our Preferred Scenario


August US CPI inflation data didn’t alter flagged Fed plans to keep policy rates stable at next week’s FOMC meeting. They nevertheless suggest a hawkish bias for November/December meetings as headline inflation rose at the fastest pace since June of last year (0.6% M/M). Rising energy (commodity) prices risk complicating the global disinflationary process in coming months. Core CPI rose by 0.3% M/M with the Y/Y-number down to 4.3% from 4.7%. Higher transportation (services) costs are something to look out for. US Treasuries sold off in a first instinctive move, but CPI numbers were too close to consensus to trigger a new downleg. Immediately, some return action followed with Treasuries in the end recording gains. The US $20bn 30-yr Bond auction was awarded at the highest yields since 2011 (4.345%) which was a full bp above the 1:00 PM bid yield. The bid cover ratio was slightly better than recent average (2.46). Daily changes on the US yield curve eventually ranged between -5.1 bps (2-yr) and -0.8 bps (30-yr). The US dollar whipsawed around the time of the CPI release, but eventually didn’t bother the loss of interest rate support, closing at EUR/USD 1.0730. US stock markets closed mixed (Dow -0.2%; Nasdaq +0.2%).

German Bunds underperformed following some final hawkish repositioning ahead of today’s ECB gathering. A Reuters article suggested an increase of June’s 3% inflation forecast for 2024 this afternoon, bolstering the case for a rate hike even if flanked by weaker growth prospects for this year and next. A 25 bps rate hike today is our preferred scenario as well. Apart from the pivotal inflation argument, we think that from a communication perspective the ECB will prefer a dovish/neutral hike over a hawkish skip. It allows time to extend the data-dependent approach until the December policy meeting with new quarterly updates and to pause in October. From a short-term perspective, it offers the benefit of clarity, reducing market volatility. Additionally, it buys the ECB time to review the run-off of its balance sheet with some hawkish governors suggesting to speed up the process through active sales from the APP bond portfolio or to end PEPP-reinvestments sooner than currently flagged (2025 at the earliest). We believe that today’s finetuning rate hike could push (ST) EUR rates and the euro in a first reaction higher, but like US CPI data yesterday we fear that especially on FX markets this could be short-lived as it will be perceived as the ECB’s final hike. Moves on FI markets could last more with the ECB stressing the need to keep policy restrictive for a long time.

News and views

Australian employment grew by 64.9k in August, crushing a 25k estimate. It followed a downwardly revised drop in July of -1.4k. The number of unemployed dropped slightly by around 3k, keeping the unemployment rate unchanged at 3.7% and close to the record low of 3.4% seen in October last year. The participation rate meanwhile rose to a record high of 67%. The head of the Australian Bureau of Statistics Jarvis said this continues to reflect a tight labour market. The strong labour market report loses some shine when noting the bulk of the employment increase came on the account of part-time jobs (62.1k). Hours worked also fell 0.5% in August. On a yearly basis, hours worked still grow faster (3.7%) than the annual increase in employment (3%) though. The Australian dollar whipsawed after the publication. AUD/USD is currently trading just shy of the intraday highs above 0.644. Swap yields temporarily rose before the fine print of the report kicked in. Current changes vary between 2.3-4.3 bps with the belly outperforming. Today’s numbers do little to alter the expected outcome for the Reserve Bank of Australia’s October 3 meeting (or any other meeting later this year). The RBA held rates steady for a third time straight this month at 4.1% and is seen to keep them at that level at least through 2024H1.

The IMF said that global debt as a percentage of GDP fell sharply in 2022 for a second year straight, from 248% to 238% in 2021. This compares to the 258% seen in 2020 after governments worldwide rolled out massive stimulus programs to cushion the impact of Covid. The decline in 2022 (and 2021) followed strong, post-pandemic growth as well as sharper-than-expected inflation. That said, the 2022 ratio is still above the pre-pandemic level of 238% in 2019. In addition, the IMF foresees global debt resuming its rise again going forward as inflation should stabilize at a low level over the medium term while the rebound of real GDP growth is fading.

KBC Bank
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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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