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Strong demand for labour, not a lack of potential workers, has driven the euro-zone’s unemployment rate to a record low. Employment gains have been biggest in public services and we expect demand for labour to hold up even as economic activity softens …
16th June 2022
We expect the Norges Bank to step up the pace of tightening at its policy meeting next Thursday (23 rd June) with a 50bp rate hike, to 1.00%, and to indicate that it will probably raise interest rates again at its “interim” meeting in August. Recall that …
Shortages of food supplies and surging prices have led some EMs to impose export restrictions on key agricultural products, a trend that threatens to become more prevalent and serve to keep prices elevated and inflation high. Some EMs are also attempting …
By raising interest rates by 25bps (basis points) today, from 1.00% to 1.25%, rather than by 50bps or the 75bps the Fed announced last night, we think the Bank of England is putting too much weight on the softening economy and not enough on surging …
Hourly wage growth finally picking up The acceleration in euro-zone wage growth at the start of the year is consistent with the timelier data already published and the message from pay negotiations. Against a backdrop of high inflation and a tight labour …
After the excitement of yesterday’s ECB emergency meeting and 75bp hike by the US Fed, the SNB kept its end up by unexpectedly raising its policy rate by 50bps this morning – its first rate rise since 2007. Given its history of unscheduled announcements, …
The recent falls in the Turkish lira have led to increased speculation that, with the CBRT showing no sign of willingness to raise interest rates, policymakers will be forced to turn to capital controls to prevent sharp and disorderly moves in the …
The Turkish lira is once again depreciating sharply against the US dollar and we expect this to continue. We revise our forecasts for the lira and pencil in further substantial weakness by the end of 2022, to 24/$. The lira has plunged ~15% or so against …
15th June 2022
The ECB’s press release following its unscheduled meeting fell short of announcing a fleshed out spread-fighting tool that could provide a permanent solution to the problem. Flexible PEPP reinvestments might buy policymakers a little time, but the new …
Outlook still bleak despite a rise in production The increase in industrial output in April only partially reversed the decline in March and shows that the economic fallout from the Ukraine war is still holding back production. With survey data pointing …
News that the ECB Governing Council is holding an emergency meeting today shows that policymakers are taking the threat of rising peripheral yields more seriously than they were last Thursday at their regular policy meeting. Ten-year Italian yields have …
Capital outflows from EMs appear to have eased over the past month, but rapidly tightening external financing conditions mean that this won’t last for long. Large outflows already seem to have pushed Turkey to the brink of a(nother) currency crisis, and …
14th June 2022
We suspect that the spread between 10-year Italian and German government bonds would need to widen by another 100bp or so, to around 3.5%, to force the ECB to make a stronger formal statement of support for peripheral bonds. And even then, any initial …
A recent MSCI article speculated that real estate investment could buck the deglobalisation trend given distinct features of the asset class, though we are not convinced that will bring many benefits. We have been writing about the end of globalisation …
Mortgage rates to continue to rise as lenders rebuild margins The detailed quarterly mortgage lending data from the Bank of England confirmed that the squeeze on lenders margins intensified at the start of the year, suggesting that mortgage rates will …
Israel’s labour market has tightened significantly in recent months and while there is so far little sign of a burst of wage pressure coming through, this is likely to be in the pipeline and feed through into stronger core inflation next year. Alongside a …
Investor sentiment consistent with recession in Germany A second consecutive small monthly rise in the ZEW measure of German investor sentiment in June means it was still well below its level at the start of the year, and pointing to a recession. The …
First signs of a less tight labour market The tentative evidence that the recent weakening in economic activity is filtering through into a slightly looser labour market may push the Bank of England a little closer to raising interest rates by 25bps …
50 basis point hike in June now looks nailed on The stronger-than-expected increase in Swedish inflation in May lends support to our forecast that the Riksbank will step up the pace of tightening. A 50bp hike in the policy rate now looks increasingly …
Greece has already made a more complete recovery from the pandemic than most of its peers and the short-term outlook still looks relatively good. The country is less exposed to Russia-Ukraine risks than many, and surging tourism revenues should lift GDP …
13th June 2022
The Prime Minister last week announced a trio of policies aimed at reversing the decline in home ownership since the financial crisis. We doubt the schemes will make a big difference, although more consistent availability of low deposit mortgages could …
Economy’s robust performance continues Turkey’s activity figures for April suggest that the economy has held up well since last year’s currency crisis, but robust activity has added to inflation pressures and contributed to the widening of the current …
Bank may have to raise rates during a recession The 0.3% m/m fall in real GDP in April wasn’t as weak as it looks, but it nonetheless increases the chances that the economy is slipping into recession. While this is unlikely to prevent the Bank of England …
We are raising our forecasts for euro-zone 10-year government bond yields and “peripheral” spreads to reflect the ECB’s further hawkish shift as well as its apparent unwillingness to commit to a strong backstop for peripheral bond markets . The sell-off …
10th June 2022
Tighter ECB policy could cause house prices in the euro-zone to fall, but we think that a housing crash will be avoided even in the Netherlands where the risks are largest. Against the backdrop of ultra-loose monetary policy, supportive fiscal policy, and …
Turkey: anything but rate hikes The Turkish lira remained under pressure this week and officials unveiled on Thursday a raft of measures aimed at tackling inflation and bolstering the currency. The Treasury revealed that it will issue lira-denominated …
The Russian central bank (CBR) delivered a 150bp interest rate cut to 9.50% today as its focus continued to shift away from inflation risks towards supporting the economy. We think further reductions are likely to be more gradual, with rates ending this …
Farewell Stockholm, hello Basel It was announced this week that Cecilia Skingsley will up sticks from Stockholm to Basel in August and leave her role as First Deputy Governor of the Riksbank to head up the BIS’s Innovation Hub. It’s fair to say that Ms …
The ECB announcement yesterday that it intended to raise rates in July came as little surprise given the communications from ECB officials over the past few weeks or so. More interesting was the ECB’s strong suggestion that after the planned 25bp rate …
As former Prime Minister Harold Wilson once said, “a week is a long time in politics”. At the start of the week the current Prime Minister, Boris Johnson, was fighting for his political life with 41% of his own MPs voting to remove him as leader of the …
Case for a step-up in the pace of rate hikes in June is now overwhelming The stronger-than-expected increase in Norway’s core inflation rate in May lends support to our forecast that the Norges Bank will step up the pace of tightening later this month. A …
China’s inflation data may add to evidence that lockdowns were disinflationary (02.30 BST) High food and energy prices probably kept inflation above 8% in the US … (13.30 BST) … and elevated inflation probably weighed on consumer confidence in early June …
9th June 2022
Softer demand for steel in Europe has dragged prices lower recently, despite production in the region being constrained by high production costs. We expect prices to fall a little further to €900 per tonne by end-year from around €950 currently . The war …
The latest polls for this month’s legislative elections in France raise the possibility that Macron’s party and allies may not win a majority. But even so, support from the centre-right might avoid a lame-duck presidency, allowing Macron to push through …
Today’s policy statement and press conference sets the stage for the ECB to raise interest rates by 75bp by September and we expect that to be followed by two more hikes this year. The Bank’s failure to provide any more details about its backstop plans …
The markets and consensus are underestimating the chances of a 50bps rate hike It’s almost 50-50 between a 50bps and 25bps hike, but we’re going for 50bps Either way, recent events support our view that interest rates will rise to 3.00% next year The …
Higher alternative asset yields drove a sharp deterioration in European property valuations in Q1. (See Chart 1.) Valuation scores declined across all sectors, though retail remained in fair value territory. With the surge in bond yields continuing into …
The latest London Crane Survey showed office space under construction rose marginally, but will increase further as supply rises. This supports our view that increased supply over the next two years will keep vacancy rates high. As a result, we expect …
Signs that inflation has already peaked The sharp fall in Russian inflation in May to 17.1% y/y suggests that inflation may have already peaked and price pressures are likely to ease further in the coming months. This will give the central bank room to …
8th June 2022
Real economic growth is slowing rather than collapsing in the face of the twin drags of higher inflation and rising interest rates. The Chancellor’s latest fiscal handout will help support GDP in the second half of the year. And with the Prime Minister …
The Turkish lira has continued to slide and the current backdrop is eerily similar to that which preceded previous currency crises. Sharp and disorderly falls in the lira over the coming weeks are now a real risk. The lira slipped beyond 17/$ this morning …
Construction sentiment worsens as economic headwinds mount The second consecutive fall in the construction PMI in May points to a sustained slowdown in development activity. And with the new orders balance easing and optimism of future demand declining, a …
Economy likely to undershoot expectations The upward revision to euro-zone GDP in Q1 was in large part down to the huge increase in Ireland, where the GDP data are notoriously unreliable. So the data aren’t as good as they look. And we still think that …
German industry to contract in Q2 April’s increase in industrial output reversed only a fraction of the decline in March and shows that high energy prices, the Ukraine war and ongoing supply shortages are still having a major impact. We expect industrial …
With some important exceptions, including the German manufacturing sector, economic activity seems to have held up a little better than we had feared so far in Q2. We don’t think this will last. The recent strength has been helped by the re-opening of …
7th June 2022
We forecast the SNB to largely shadow ECB rate hikes over the next 18 months or so, albeit allowing the interest rate differential with the euro-zone to widen from 25bps at present to 50bps by end-2022. But the balance of risks is skewed towards the Bank …
Sanctions take their toll as activity falls sharply in April The April activity data for Russia released today show that the imposition of Western sanctions has caused a sharp fall in oil and gas production, a plunge in motor vehicles output and resulted …
1st June 2022
The S&P Global EM Manufacturing PMI for May suggests that the easing of virus-related disruptions in China supported a small rebound in EM manufacturing last month, but the sector remains very weak. And the effects of the war in Ukraine are taking an …
ECB will leave rates unchanged next week but raise rates by 50bp in July. Bank staff will revise inflation forecasts up , growth forecasts down . ECB to keep us (and itself!) guessing about design of anti-fragmentation tool. Members of the ECB Governing …
Enough has been said elsewhere about how the leap in euro-zone inflation in May is making it difficult for the ECB, which will need to explain next week why policy rates are still negative. So in this Weekly we will turn our attention to how inflation is …
