1/5 The ECB has a strong track record of tightening policy into recessions. Tightening into the GFC (last hike was July 08). Tightening into the EZ crisis. And, despite both service & manufacturing PMIs below 50, Lagarde is still hawkish (having tightened 450bps in the past yr).
2/5 There were, though, more signs of deflationary pressure today (the final CPI reading for Nov was revised down, albeit modestly). The median inflation rate, across the subcomponents of CPI, is back at βnormalβ/low levels (m-o-m, see chart below).
3/5 And it probably goes lower given that private sector deleveraging is underway. This morning the ECB raised capital requirements for banks on concerns about bad loans. That, no doubt, dampens risk appetite in the banking system (encourages more deleveraging).
4/5 So when does Lagarde back down? Well the rates market is looking for ~130bps of ECB cuts next year (chart below). So, some of the (forthcoming) pain in the EZ is already priced in.. but thereβs probably more to price on an ECB pivot (as there was with the Fed last Wednesday).
5/5 And, when she does pivot, what happens to EURUSD? On our medium-term scoring system, EURUSD is overbought (and is now a crowded long trade), see chart below.
For more thoughts on EZ macro & markets pls email nick@longvieweconomics.com
For more thoughts on EZ macro & markets pls email nick@longvieweconomics.com
Loading suggestions...