The ECB responds to market fragmentation, but it still needs to deliver something concrete, eventually.
If the SNB raises its inflation forecast to 2% or above for 2023 and 2024, hikes are coming.
An unwinding of favourable bank deposit tiering levels or softer language on the CHF, imply the same.
Claus Vistesen (Chief Eurozone Economist)Eurozone
The neutral rate in the EZ is falling over time; it was likely negative immediately after the financial crisis.
We estimate the long-run neutral real rate to be 0.7% in the EZ, but the ECB policy rate won’t get that far.
We see the terminal ECB rate at 1.2-to-1.3%, 0.7-to- 0.6pp below current market-pricing.
Claus Vistesen (Chief Eurozone Economist)Eurozone
The ECB will cross the Rubicon today, priming markets for the first rate hikes since 2011.
We still think the deposit rate will be zero by July, probably via a 50bp rate hike next month.
The ECB’s new forecasts will be stagflationary; the 2024 baseline for inflation will increase to 2%.
Claus Vistesen (Chief Eurozone Economist)Eurozone
The ECB is nailing its colours to the mast; the deposit rate will be hiked in July and September.
The euro is a decent predictor for import price inflation in some goods, but not for the core HICP.
Soaring PPI inflation points to sustained upside risks for core consumer goods inflation in Q2.
Claus Vistesen (Chief Eurozone Economist)Eurozone
EZ trade data show that sanctions hit trade with Russia hard, and energy imports fell in March.
Progress in imposing an oil ban has stalled, as four countries, led by Hungary, threaten to veto it...
...The risk to our assumption that the EU will push ahead with a ban on gas soon, is towards no ban.
Melanie Debono (Senior Eurozone Economist)Eurozone
- Italy is the second-most reliant major EZ economy on Russian gas, after Germany.
- Cutting reliance on Russian gas is already hurting industry; we are revising down our GDP forecasts.
- We have revised up our EZ inflation estimate for March, after Spanish & German headlines surged.
Melanie Debono (Senior Eurozone Economist)Eurozone
- We are revising down our euro area GDP forecast for this year, by 0.6pp to 3.2%.
- In a mild scenario, the war between Ukraine and Russia shaves 0.3pp off our 2022 forecast...
- ...But in a worst-case scenario, where the war lasts past this year, GDP growth would be 1.5pp lower.
Melanie Debono (Senior Eurozone Economist)Eurozone
- PMI data for February surprised on the upside; services activity is rebounding faster than expected.
- We are raising our Q1 EZ GDP growth forecast, by 0.3pp, to 0.5% quarter-on-quarter.
- Pricing intentions surged again, piling pressure on the ECB to unwind stimulus measures.
Melanie Debono (Senior Eurozone Economist)Eurozone
- Comments from Mr. Lane and Ms. Schnabel add to evidence of a hawkish shift in ECB policy.
- French core inflation fell in January, but it will re- bound quickly, to 2.0%, where it will stay through Q3.
- EZ construction fell in Q4, again, and consumer sentiment remained soft midway through Q1.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- EZ industrial production fell again in Q4, but a rebound is underway; Q1 should be solid overall.
- Output in the EZ auto sector snapped back in Q4; we're hoping for more of the same in Q1.
- A surge in EZ demand for Chinese manufacturing goods is the main driver of the trade deficit in goods.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- The slowdown in real M1 growth warns of a composite PMI in the low 50s through Q2.
- Inflation will weigh on real wage growth in H1, but households have savings to smooth consumption.
- The ECB would think twice about tightening if Q2 growth disappoints, but no respite in the near term.
Claus Vistesen and Melanie Debono (Eurozone Team)Eurozone
- The ECB is pushing back against the dramatic shift in forecasters’ expectations for tighter policy.
- German core inflation fell only slightly in January; the core HICP rate will rise to 3.5% by April.
- The Swiss don’t have an inflation problem, unlike their neighbour, despite the rise in prices in January.
Claus Vistesen and Melanie Debono (Eurozone Team)Eurozone
- EZ inflation blew past expectations in January, leaving the ECB in a tight spot today.
- Risks are tilted towards a quicker than expected withdrawal of QE; we look for a taper to zero in Q4.
- The ECB's bank lending survey points to strong demand for credit, and banks are willing to lend.
Claus Vistesen and Melanie Debono (Eurozone Team)Eurozone
- German retail sales were hit hard by virus restrictions at the end of the fourth quarter…
- …But the labour market is going from strength to strength; unemployment will fall below 5% soon.
- Unemployment in the EZ hit a record low of 7% in December; it will fall much further this year.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- The EZ economy expanded by 0.3% q/q in Q4, in part due to a boost from the Italian economy.
- Growth in both Italy and the EZ is slowing now, but will snap back in Q2.
- EZ headline and core inflation fell in January, but remained high, and the latter will rebound quickly.
Claus Vistesen and Melanie Debono (Eurozone Team)Eurozone
- The ECB will buy most of what governments need to issue this year, but 2023 will be different.
- We look for bund yields to rise to 0.5% by mid-2023, with the 2s10s yield curve steepening to 90bp.
- Our baseline is for constant BTP spreads; this implies yields at 1.8% by the middle of next year.
Claus Vistesen and Melanie Debono (Eurozone Team)Eurozone
- Inflation in the EZ has peaked, but core inflation above 2% will be a challenge for the ECB in 2022.
- Watch services inflation closely after the decline in January; it could hit 3%-plus in Q3.
- We see three conditions for the ECB to lift its deposit rate by 30bp in H1 2023.
Claus Vistesen (Chief Eurozone Economist)Eurozone
- We still think net trade supported GDP growth in Q4, despite the nominal goods trade deficit.
- Leading indicators suggest net exports won't pro- vide much of a boost to GDP growth in 2022.
- Full-year German GDP data for 2021 suggest growth was slower than previously thought in Q4.
Claus Vistesen and Melanie Debono (Eurozone Team)Eurozone
- Decent hard data lead us to raise our Q4 forecast for Italy, as for Spain, but GDP growth has slowed.
- Italian GDP likely rose by 0.8% in Q4; Q1's outcome will be little more than zero, as virus restrictions bite.
- An early election in Italy would put upward pressure on BTP yields, but it would prove short-lived.
Melanie Debono (Senior Eurozone Economist)Eurozone
- Valuations point to subpar returns for euro area large-cap equities in the post-pandemic expansion.
- Equities in Spain and Italy are priced for average returns of around 10% in the next five years…
- …The corresponding numbers for German and French equities are just 5% and 2½%, respectively.
Claus Vistesen (Chief Eurozone Economist)Eurozone
