ECB rate rise to tackle inflation may come earlier than planned

European Investment Manager21 Jun 2022

European equity markets got off to a jittery start in May 2022 following a sell off in US equities, including a -4.5% fall for the technology heavy Nasdaq index into the close of trading on the last day of the month in April. This, combined with fears over the impact of potential sanctions on Russian oil and a Covid-19 fuelled lockdown in China saw markets not only falling but in Sweden a so-called “flash crash” caused a -8% fall for the OMX Index in Stockholm. While this particular incident was subsequently put down to human error, the underlying move for the equity market only served to demonstrate the continuing concerns over the Russia/Ukraine war and the impact the government measures in China were having on this all important economy.

Of course, one of the most concerning impacts of these events remains that of inflation which showed signs of accelerating over the course of the month. This prompted comments from an ECB Executive Board member that despite expectations of a rate rise in the latter part of the year, the central bank may have to act earlier, even as soon as July. This increased hawkishness was unwelcome ahead of a US Federal Reserve meeting already expected to unveil an aggressive trajectory for rates there. In reality the outcome of the meeting was more positive for markets with chair Jerome Powell delivering a 50bps rise, dismissing calls for 75bps and suggesting an overall softer approach than many observers had expected.

The expectation of a soft landing for the US economy allowed equites to begin to recover some lost ground. But the relief was short lived with the fears of an overall growth slowdown proving more powerful than the antidote of caution among central bankers. The month also saw the first quarter reporting season draw to a close shedding some light on the overall health of corporate Europe. While there were some examples of companies succumbing to the pressure on growth and spiralling prices these remained in the minority and confined to those with weak pricing power or direct exposures to hotspots such as China. Despite many positive outlooks the relatively good news is largely backward looking, and we look forward to the Q2 reports with more trepidation.

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