Please see below, the ‘Daily Update’ from EPIC Investment Partners for a brief analysis of the key news from markets and economies across the world. Received today – 28/07/2023
Earlier this week, we heard that eurozone banks reported a sharp fall in corporate loan demand, which has fallen to its lowest level on record (since the survey started in 2003). The ECB’s quarterly survey of banks also showed a striking fall in household loan demand and tightening financial conditions, which highlight the impact increasing borrowing costs have had on the eurozone economy. Despite this, the ECB continued on its tightening path, with inflation being the main priority.
As was well priced in, the ECB increased rates by 25bps, to 3.75% on the deposit rate, and left the door open for further hikes. In a statement, the central bank noted that although inflation has been declining, it will likely remain “too high for too long”. Headline eurozone inflation fell to 5.5% in June, from 6.1% previously, however, remains way above the 2% target. There was no forward guidance given, the ECB will maintain its data dependence approach in “determining the appropriate level and duration of restriction”. The statement also highlighted the effects of past tightening as increasingly dampening demand across the region.
In a surprise move, the ECB “set the remuneration of minimum reserves at 0%,” to ensure “the full pass-through of interest rate decisions to money markets”. Adding that “it will improve the efficiency of monetary policy by reducing the overall amount of interest that needs to be paid on reserves in order to implement the appropriate stance.”
Later, ECB President Lagarde repeated: “We want to break the back of inflation”. She also reiterated the data dependence approach, adding that the ECB is unlikely to give forward guidance. She said the ECB has an “open mind” going into the September meeting, adding “We might hike, we might hold.” She came across slightly dovish as she discussed the bloc’s economic outlook and the changing drivers of inflation; namely wage growth and profit margins.
As with the Fed, the ECB’s next meeting is in September, which will allow it a natural pause and lots of data to plan its next steps. Unlike the US, however, inflation in the eurozone is falling much slower, with some calling for a 2% target to be hit at the earliest in 2025. Moreover, the economy is not holding up as well; business activity (measured by the S&P Global PMIs) shrank more than expected, with only services in expansion in July. Prelim. S&P Global PMI readings in key economies (e.g., France) are well in contraction, and the manufacturing gauge in Germany fell to 38.8, with the composite reading dropping into contraction.
The eurozone’s official Q2’23 growth and inflation figures are due on Monday, expected at 0.1%qoq and 5.2%yoy (prelim. for July), respectively. Earlier this week, the IMF said it expected the eurozone could grow by 0.9% this year. However, this factors in a recession in Germany, where the GDP is expected to contract by 0.3%. The Fund noted that Italy will grow at a faster rate than the bloc’s two largest economies, Germany and France.
Lastly, it would be remiss of us to not highlight the new Governor of the BoJ, Kazuo Ueda’s surprise tweak to yield curve control (YCC) flexibility. The central bank will allow 10-year benchmark yields to have a 50bp tolerance, as reference points rather than “rigid limits”. Thus, the central bank will buy the 10-year at 1% each day instead of 0.5%. The BoJ upgraded its forecasts for inflation for this year, to 2.5% (from 1.8%), then falling to 1.9% (from 2%). Having held short-term interest rates at -0.1%, Japan is the only country left with negative interest rates.
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Alex Kitteringham
28th July 2023