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Ms. Lagarde pushed back against rate expectations yesterday, but markets didn't listen. A deposit rate hike in 2022 would mean a swift end of QE next year; that won't happen. Eurozone inflation likely blew past the consensus again in October; we look for a headline of 4% y/y.
Rising rate expectations are at odds with the ECB's forward guidance; we expect a push-back today. We still think the PEPP will end in March, but don't look for a clear signal today either way. Mixed consumer confidence data in the core, and a slowdown in headline EZ money supply growth.
French GDP growth rebounded strongly in Q3, from a lacklustre Q2; we look for a 2.4% rise in output. Italian GDP is also likely to have posted a solid quarter, but base effects kept a lid on the headline. Spain's economy likely took pole position in Q3; services exports rocketed as tourism reopened.
We think GDP in Germany rose by 1.8% q/q in Q3, 0.4pp slower than the consensus forecast. Sell-side forecasts for German GDP growth in 2021 will have to come down, to around 2.5%... ...And we also struggle with consensus expectations for 4-to-4.5% growth in 2022; we're at 3.5%.
A four-week Covid lockdown in Latvia is a warning shot across the bow for the EZ... ...But we're sticking to our view that hospitalisations will remain contained, even as cases rise. Early survey data for October hint at robust economic activity at the start of Q4.
Euro area energy inflation will rise further in Q4, but we think the core rate has peaked. Risks are tilted towards persistently high core and headline inflation in the next 12 months... ...But that doesn't justify the leap in Eurozone rate expectations in the past few weeks.
EZ construction output slipped in August, all but ensuring a decline through Q3 as a whole. Shortages in labour and raw materials are holding back construction, but output should rebound in Q4. A traffic light coalition is now a solid base-case in Germany, but a leap in fiscal stimulus isn't.
EZ equity earnings have recovered handsomely this year, leaving valuations more attractive. Markets still expect strong earnings growth in the next 12 months; the macro data suggest otherwise. The pace of policy tightening implied by global rate expectations will soon be an issue for EZ equities.
Gas prices in Europe have continued their rise since the start of the year... ...Governments are trying hard to shield consumers, but businesses will be hit harder. Our analysis shows that consumers and firms in Spain will be impacted most in the EZ
German core inflation is still rising; we think it will hit 3%-plus in Q4, before easing in January. Electricity inflation in Spain is still rocketing, threatening consumer's real incomes and industry. Core inflation in Spain is now back at its pre-virus rate; should we be looking for an overshoot now?
The burden of adjustment in France's budget deficit in 2022 will fall on lower expenditures... ...But the preliminary budget looks overall growth friendly; it will be 2.0pp wider than before the virus. We see an outsize risks of tax hikes in H2 22, and yields will have to rise as ECB support wanes.
We look for lower consensus growth forecasts in Q4, even as inflation forecasts advance further. Fiscal stimulus is a wildcard for 2022 GDP forecasts, but near-term risks remain tilted to the downside. Stagflation risks are real, warning of less potent fiscal stimulus and a more constrained ECB.
The Spanish government is continuing to support the recovery next year... ...But its GDP growth forecasts, reliant on hefty in- creases in investment, seem too high to us. The budget deficit is all but certain to be higher than the government's 5% estimate next year.
German auto output crashed in August; we're nudging our Q3 GDP growth forecasts down, to 2.0% q/q. The Q3 plunge in German industry is clear evidence that supply-side woes are now hitting demand. The services surplus in France is rising strongly; net exports likely rebounded in Q3.
German manufacturing crashed in Q3, due to weakness in autos; GDP growth downgrades ahead. Spanish industrial production fell again in August, but output in the auto sector rose strongly. EZ gas prices continue to climb, the risk to household income is rising, but hard to quantify.
EZ inflation expectations don't predict inflation, but they're not entirely without value either. Industrial production in France rose again in August; Q3 as a whole likely was decent. We think the PMI surveys are underestimating actual GDP growth in Q3, especially in Spain.
Inflation in Switzerland likely has peaked, keeping it lower than the headline HICP in the EZ... ...Currency effects will soon be a drag on headline inflation, to the SNB's dismay... ...Meanwhile, rising natural gas prices are no worry for the Swiss, and wage pressures are limited.
EZ inflation rose further in September, probably by 0.5pp to 3.5%, higher than the consensus, 3.3%. Core inflation in the EZ was lifted by gains in Italy and Germany in September. The rate of improvement in the EZ labour market is now slowing, but unemployment is still falling.
The Italian government's GDP growth forecast for next year looks too high to us. Spain's new ERTE scheme is the first of, probably many, Covid-led labour market reforms in the EZ. We continue to expect the EZ jobless rate to fall be- low most estimates of NAIRU by end-2023.
Ms. Lagarde strikes a dovish tone at the ECB Forum, but sticks to the script that PEPP will end in Q1. Rate expectations have increased substantially in the EZ; we doubt the ECB is happy with this. Solid consumer sentiment data in France and Germany offer contrast to soft business surveys.
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