European stocks fell on Monday [1] as investors took profit on the rally ahead of another round of rate hikes from central banks in the US, Europe [2]. The pan-European STOXX 600 index (.STOXX) was down 0.2% at the close, but off its session lows. Data showed euro zone business activity made a surprise return to modest growth in January [3], adding to signs the downturn in the bloc may not be as deep as feared and that the currency union may escape recession. Hopes of a milder recession in the euro zone and smaller interest rate increases from the Federal Reserve have buoyed European equities this year. The STOXX 600 has risen 6.7% so far in 2023, outperforming a 4.5% annual rise in the U.S. benchmark S&P 500 index (.SPX). Euro zone government bond yields fell after the business activity data as investors tried to assess the ECB’s future monetary tightening path.
References: [1] European Stocks Drop as Investors Brace for Fed, ECB Rate … [2] Bloomberg on Twitter: “European stocks fall as investors brace … [3] European shares slip as economic growth data fuels rate hike …
Outlook has shifted since Lagarde’s December pledge on rates
The views of the European Central Bank’s Governing Council have shifted since President Christine Lagarde made a pledge in December to keep interest rates low. This has caused a divergence of opinion amongst the members of the Council, with some wanting to raise rates at a brisk pace while others are in favor of keeping rates low [1]. Lagarde is now facing the opposite problem, with investors becoming more and more sceptical of her policy signals [2]. In an effort to unify the Council, the ECB decided to raise interest rates by 0.5 percentage points in December and promised to continue increasing borrowing costs significantly until 2025 [3].
References: [1] ECB Debate Looks to March With This Week’s Hike Assured [2] Analysis: ECB seen struggling to keep market on side after … [3] ECB lifts interest rates by half a percentage point, expects …
Can the ECB return inflation to its 2% goal?
Yes, the European Central Bank (ECB) is committed to doing everything necessary to return inflation to its goal of 2%, as stated by its President Christine Lagarde [1]. The ECB’s primary objective is to maintain price stability, which is best achieved by aiming for 2% inflation over the medium term [3]. To this end, the ECB uses the Harmonized Index of Consumer Prices (HICP) to measure inflation and includes costs related to owner-occupied housing in the HICP [3]. Moody’s is monitoring the impact of recent developments on its rated portfolio in Indian conglomerate Adani Group, whose stocks have plunged after a report by a U.S. short-seller [2]. T-Mobile delivered better-than-expected profits in the fourth quarter and a forecast for full-year cash flow that matched expectations [2]. The ECB is thus taking a proactive approach in its efforts to return inflation to its 2% goal.
References: [1] ECB Will Stay Course to Return Inflation to 2%, Lagarde Says [2] ECB Will Stay Course to Return Inflation to 2 … – Yahoo Finance [3] Two per cent inflation target – European Central Bank
What to expect ahead of the BoE/ECB rate decisions for today? BoE interest rates to 4%
As the Bank of England and European Central Bank prepare to make rate decisions this week, investors are expecting the two major central banks to raise interest rates on Thursday. The Bank of England is expected to raise its interest rate by 50 basis points, taking it to 4% [4]. The ECB is also expected to raise its interest rate by 75 basis points, bringing it to 8.1%, 5.5%, and 2.3% over the next several meetings [1], [2]. The ECB has promised to continue raising significantly – and that word is, significant – as the bank forecasts a return to potential growth in 2022 [3]. The market is expecting that the two central banks will continue to maintain a cautious approach to rate hikes, as the global economy continues to grapple with the COVID-19 pandemic.
References: [1] Central banks set to signal interest rate glide path in crucial … [2] Monetary policy decisions – European Central Bank – europa.eu [3] ECB Preview (European Central Bank) – FXStreet [4] Bank of England set to raise interest rates to 4%
