Yesterday, the Bank of Canada (BoC) raised its policy rate by 75bp at yesterday’s meeting, as expected.
Today, the European Central Bank (ECB) will decide by how much they will be raising their policy rates. There are two camps: The 75bp-hike camp believes that the ECB should hike the rates relatively faster to tame the surging inflation in the EZ. The 50bp-hike camp argues that a 75bp hike is too much for an economy that faces a terrible recession – amid the worsening energy crisis.
Released yesterday, the latest GDP report from Europe came in slightly better-than-expected in the second quarter, but obviously, there is nothing to be optimistic about. Europeans built many sectors relying on the cheap Russian energy, like industrial and chemical sectors, and Russia cutting supply to zero, is obviously a big blow to these economies, which should rethink their energy model. And it is not simple, and the energy transition won’t happen overnight. Therefore, and understandably, growth expectations are falling for Europe, and are falling quite sharply for next year. In 2023, the Eurozone is expected to grow no more than 1.4%, and the British GDP growth is seen no more than 0.8%. And I believe, these expectations are still optimistic.
So, what will the ECB do? What CAN the ECB do? Nothing magic and life-changing, really.
The European inflation problem is much related to the energy crisis. Much more than the US, where a part of inflation is due to excessive demand and surging wages, which could be controlled with higher rates. So, raising rates may partially work for the US, and bring inflation down. But raising the interest rates in Europe won’t get the Russians to restore the gas flow back to Europe, and fix things. This is what many people, including the ex-ECB chief Mario Draghi defend.
BUT, a steeper rate hike policy could at least slow down the euro’s depreciation, and have a cooling effect on inflation. I say, slow down, because at this point, there is not much to do to stop the bleeding in the euro. The euro will likely continue losing weight, along with the European economies. But the slower the slide, the better for the economies.
Therefore, a 75bp hike could help the euro slide slower, although there is no quick fix to the European energy crisis, and the recession is what the Europeans will be dealing with this winter, with or without higher rates.
Strong dollar hasn’t been bad for the US exports
With the stronger US dollar, you would expect the US exports to slow. But the contrary is happening. The US trade deficit fell to $70.7 billion in July, from $80.9 billion in June and an all-time high of $106.9 billion revealed in March. There has been a slight rise in exports combined with a sharp decline in imports. That’s the opposite of what should’ve happened in theory.
White House said that the fact that ‘real goods exports reached record levels is an encouraging sign of the resilience of the American economy’, and ‘a reflection of the President’s economic plan, which has helped position American manufacturers to win in key areas from semiconductors to clean energy’. Or the Ukraine war just helped the US export more energy. Full stop.
Stocks rebound, but gains remain fragile
US equities had a strong rebound yesterday. The S&P500 advanced 1.83%, while Nasdaq jumped 2%. Apple gained a bit less than 1% as it revealed the new iPhone.
But the latest words from the Federal Reserve (Fed) members weren’t softish, at all. The Fed’s Vice Chair Lael Bainard repeated that the rates will be hiked to restrictive levels, and they will stay there for ‘some time’. This means there will be no cut to be anticipated just yet.
Loretta Mester said that the US benchmark rate will go above 4% in the early 2023, and that there will be no cut to be anticipated just yet.
The Fed Chair Powell is due to speak today as well, and he will also repeat that there will be no easing to be anticipated just yet.
And they will keep repeating this until the market gets it right: there is no policy easing, and lowering rates in horizon for the Fed. So, it’s normal that some big investors continue warning that the bottom in equities is not hit just yet. The Big Short’s Michael Burry is one of them.
Commo & precious metals
Gold bounced back above the $1700 mark, thanks to a broad retreat in the US dollar. But the risks remain tilted to the downside as long as the dollar’s strength remains the main catalyzer of price action.
Bitcoin hit $18500 yesterday, and will likely encounter solid offers into the $20K, unless we see a sustainable rebound in other risk assets, like equities. But fundamentally, there is little reason to bet for a sustainable risk rebound.
And the US crude dived near 6% to $81.50 a barrel, as the global recession fears outweighed the supply side concerns.
