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Dark clouds are forming over the near-term economic outlook.
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.
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