ECB narrative remains focused

Stronger than expected US jobs data, as well as rampant producer price inflation, challenged the narrative that the Federal Reserve would soon slow the pace of interest rate increases and in turn support the continued year end rally in global equity markets. Fed Chair Jerome Powell acknowledged the threat this robust economic data posed in his speech following the policy-setting committee’s latest increase in benchmark rates. Here he laid out his willingness to inflict pain on the US economy in order to battle the on-going threat of inflation.

The 50bps rise was viewed as a continued step toward a rate of 5% or greater during 2023. While reiterating his commitment to the 2% inflation target, he ominously stated that he wished “there were a completely painless way to restore price stability. There isn’t, and this the best we can do”. The unanimous support of his Fed colleagues underscored this commitment.

In Europe the ECB set a similarly hawkish tone and also raised rates by 50bps. In addition, a commitment was made to begin shrinking the bank’s almost €5 trillion balance sheet from March 2023. This will be achieved by not reinvesting maturing assets suggesting this will be a long-term process. The outlook for inflation was raised and a return to the targeted 2% level is still not envisaged by 2025. While equity markets fell heavily on the day of this announcement the MSCI Europe ex UK finished the month relatively unscathed falling by only 0.8%.

Soothing words from Chinese lawmakers pledging to revive consumption in the region which remained hit by continued Covid-19 inspired lockdowns, combined with the hope of re-opening in early 2023, perhaps helped stem the losses with the potential of this all important economy easing supply chain bottle necks and once again contributing to global economic growth at a much needed time.

Toward month end some encouraging data emerged from Germany in the guise of producer prices and the IFO expectations survey which suggested, against the predictions of the ECB, a rolling over in the rate of inflation and the prospect of a return to growth in 2023. Highlighting the fact that the pressure on prices has so far been driven by energy and commodities particularly food, the lack of pressure from internal demand in Europe gives some hope for the prospects for 2023 for the region.

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