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Thursday, October 6, 2022

Marketmind: Hey ECB, how high will you go?

Marketmind: Hey ECB, how high will you go?
© Reuters. The skyline with the banking district and the headquarters of the European Central Bank (ECB) are photographed in Frankfurt, Germany, October 4, 2021. REUTERS/Kai Pfaffenbach

A look at the day ahead in markets from Dhara Ranasinghe.

There’s little doubt the European Central Bank will on Thursday confirm it will pull the plug on years of stimulus and is getting ready to hike interest rates for the first time since 2011 to contain record high inflation.

Can we move on then? Not quite. With inflation at 8.1% and broadening out, ECB chief Christine Lagarde’s words will be watched closely for a sense of 1) how big the ECB will go in July when the rates lift off is expected to take place and 2) how high it is willing to push up rates.

Also watch what the ECB says about the degree of support it might be willing to give weaker economies as borrowing costs start to rise.

Pricing in money markets meanwhile suggests traders view the chance of 50 bps move by the ECB as increasingly likely in the coming months.

While the growth outlook has turned, many major central banks are opting for larger rate hikes. Note, Australia hiked by a bigger than expected 50 bps earlier this week.

The ECB’s key depo rate, which has been stuck at -0.50% for some time, is about to leave negative territory behind.

Graphic: Markets bet ECB will hike interest rates fast – https://graphics.reuters.com/EUROZONE-MARKETS/zdpxowdowvx/chart.png

Angst about higher rates meanwhile continues to keep world markets on edge — Asia stocks are lower, European and U.S. equity futures are in the red.

Even upbeat news from China has done little to shore up sentiment: Data showed China’s exports grew at a double-digit 16.9% pace in May, shattering expectations in an encouraging sign for the world’s second biggest economy.

And in currencies, the yen fell to a fresh 20-year low against the dollar. With the Bank of Japan wedded to an ultra-loose monetary policy and most of its peers jacking up rates fast, the yen continues to bear the brunt of widening interest-rate gaps.

Key developments that should provide more direction to markets on Thursday:

– IMF says yen’s recent ‘significant’ fall reflects fundamentals

– UK housing market shows signs of slowdown – RICS

– Federal Reserve issues quarterly financial accounts of the United States

– Bank of Canada Governor Tiff Macklem speaks

– ECB meets, press conference at 1230 GMT

– National Bank of Serbia, Central Reserve Bank of Peru meet

– U.S. initial jobless claims

– U.S. 30-year bond auction

Source: Investing.com

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