Please see investment bulletin below from Brooks Macdonald received this morning – 10/06/2022.
What has happened
Equity sentiment was soured yesterday by a more hawkish than expected ECB that signalled the use of larger rate hikes from September if the inflation picture doesn’t materially improve. European equities fell after the announcement with US equities declining further after a late sell-off in the US trading session.
ECB meeting
In terms of actual announcements, the ECB came in line with market expectations, ending their net asset purchases at the end of June, and preparing the market for a July rate hike. The key discussion was around the size of future rate hikes with 25bps signalled for July. In terms of September’s meeting the ECB said that ‘a larger increment will be appropriate at the September meeting’ if the inflation outlook ‘persists or deteriorates’. This effectively shifts the burden of proof from the ECB previously hiking rates if it saw higher inflation risks to now hiking rates unless inflation risks decline. Whilst this may sound nuanced, the announcement was a sign of intent by President Lagarde that the ECB would act to bring inflation back to target. The risk of fragmentation between national bond markets was also discussed with Lagarde committing to using new or existing tools to tackle such an eventuality. Bond markets sold off with 10 year German bund yields rising 7.4bps to an 8 year high of 1.42%. Despite the commitment from the ECB President, the difference between Italian and German yields also widened, implying a fear that conditions would have to worsen materially before ECB Governors coalesced around a new asset purchase tool.
US CPI
Today’s main event will be the much anticipated US CPI release for May. Given the late sell-off in US markets, it would be fair to say sentiment is pretty shaky coming into this release. The market is expecting month-on-month headline inflation to surge due to higher gas prices and food prices. The core reading, which excludes these components, is expected to slow on a month-on-month and year-on-year basis.
What does Brooks Macdonald think
The ECB meeting yesterday is a reminder to markets that whilst inflation remains the most important data set for all market participants (including central bankers), what is also important is the willingness of central banks to wait and see whether inflation fades. President Lagarde, by shifting the burden of proof, is effectively saying that the ECB is not willing to be patient and will use 50bp rate hikes as a tool until inflation shows signs of coming under control.
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Charlotte Clarke
10/06/2022