eurozone economy

July industrial production fell by 2.3%, reversing gains made in May and June. While Irish volatility plays a large part in recent swings, we expect manufacturing weakness to continue over the second half of 2022 – mainly due to an environment of slowing new orders and continued supply-side problems For the months ahead, the outlook remains relatively bleak While we saw a decent end to the second quarter for manufacturing, data confirms that industrial production in July was flat at best, and is likely to decline. Looking at production categories, capital goods production saw a large drop which was mainly related to big Irish swings that relate to large multinational activity. Other goods saw more of a mixed bag in terms of production. Durable consumer goods production was down, which is also true for intermediate goods. Non-durable consumer goods production partially reversed a large decline seen in June. In terms of the larger countries, Germany, Spain and France all saw production decrease significantly in July. Italy and The Netherlands saw a modest improvement at the start of the third quarter. For the months ahead, the outlook remains relatively bleak. The energy crisis has started to result in production cuts across the eurozone for the most gas-intensive producers and other supply problems have faded but not disappeared. On top of that, demand for goods is also weakening. Businesses reported that new orders slowed again in August, which means that inventories are rising and backlogs of work are falling. Overall, this suggests modest production expectations for the second half of the year in manufacturing for now. Read this article on THINK TagsGDP Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The third decline in a row for the eurozone PMI indicates that business activity has been contracting throughout the quarter. This confirms our view that a recession could have already started. At the same time, the August increase in energy prices is translating into stronger price pressures Shoppers in Lubeck, Germany German Composite PMI Reached 45.9 The third quarter clearly marks a turning point in the eurozone economy. After a strong rebound from contractions caused by the pandemic, the economy is now becoming more severely affected by high inflation both at the consumer and producer level. Led by Germany, which saw its composite PMI drop to 45.9 in September, the eurozone saw its composite PMI fall to 48.2. Both services and manufacturing output are well below 50 at 48.9 and 46.2, respectively, signalling broad-based contracting business activity. Read next:  The manufacturing sector is bearing the brunt of the problems. Supply chain problems still disturb production, but weaker global demand has caused backlogs of work to fall as new orders are decreasing quickly. Incidental production stoppages due to high energy costs are also adding to declining production in the sector. But with the tourism season behind us, there are few opportunities left for any marked catch-up effects in the eurozone economy. That has pushed the services PMI deeper into negative territory as consumers are starting to become more cautious in spending as energy bills rise across the monetary union. Overall, the view of a eurozone economy moving into recession seems confirmed by the gloomy September PMI survey. European Central Bank May Hike The Rate By 75bp The surge in gas and electricity prices in August is now leading to further price pressures emerging for businesses in September, even though other costs have been moderating due to weakening global demand. This confirms the stagflationary environment that the eurozone is currently in. The ECB has made clear that it will continue to hike in a determined manner for the short-run, as it tries to battle stubbornly high inflation. A 75 basis point hike in October is therefore definitely on the table, despite a weakening economy. Read this article on THINK TagsInflation GDP Eurozone ECB Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The drop from 97.3 to 93.7 in the eurozone economic sentiment indicator indicates a likely contraction in the economy in the third quarter. Selling price expectations have been on the rise again, increasing the risk of a longer period of stagflation in the eurozone economy Selling price expectations are increasing again as businesses face higher energy costs Is Recession Already Here, In The Eurozone? The eurozone economy is slowing rapidly as high prices reduce business activity and dampen consumer demand. We expect that a recession could, therefore, have already started. For industry, production expectations dropped sharply in September. Backlogs of work have fallen as new incoming orders disappointed in recent months and in some industries production is reduced as high energy costs impact the profitability of production. With energy costs still at unsustainably high levels for some industrial sectors, this is adding to the bleaker outlook for industrial production. For the services sector, confidence fell even more as the post-pandemic catch-up demand is fading and the purchasing power squeeze is starting to bite. The services indicator dropped from 8.1 to 4.9 as businesses indicate that demand has recently weakened and they are becoming gloomier about demand in the months ahead. Read next: Tim Moe (Goldman Sachs) Comments On USD And Turbulent Times For Markets In General, Ole Hansen (Saxo)Talks Nord Stream | FXMAG.COM  Despite the clear slowing of the economy, selling price expectations are increasing again as businesses face higher energy costs again due to the spike in prices in August. This is particularly worrisome as it could prolong a period of stagflation in the eurozone economy. For the ECB, the path is already quite clear: the central bank is set to hike in the coming meetings regardless of a slowing economy. The increase in selling price expectations will only strengthen that view for the October meeting. Read this article on THINK

The recovery in Spanish tourism seems to be slowing down. While the number of international visitors in July was still at 92% of its pre-pandemic levels, this dropped to 87% in August Tourists in Benidorm, Spain International tourism at 87% of pre-pandemic levels in August The gloomy economic outlook and the uncertain geopolitical situation now seem to be slowing down the recovery of the Spanish tourism sector. In August, Spain welcomed 8.8 million international tourists, equivalent to 87% of its pre-pandemic level. In July, 9.1 million international tourists visited Spain, which then corresponded to 92% of its pre-pandemic level. Also, total expenditures by international tourists, corrected for inflation, dropped to 85% of pre-pandemic levels in August, from 88% in July. These figures show that it will probably take another year for international tourism to return to pre-pandemic levels. The slowdown in domestic tourism was even greater than that of foreign tourism. The number of hotel stays booked by residents fell to 101% of pre-pandemic levels in August, from 107% in July. International tourists entering Spain, in % of pre-Covid levels Tourism will still support economic activity in 3Q but outlook is weaker As tourism is an important economic sector in Spain, contributing 14% to total GDP in 2019, according to the World Travel and Tourism Council, a sustained recovery is an important factor for economic growth. The tourism sector has held up much better than the rest of the economy so far. Although the recovery appears to be slowing, tourism will still continue to support Spanish economic activity in the third quarter of 2022. However, the new figures also show that the contribution of tourism to Spain's economic growth is likely to fall in the coming months as the eurozone heads towards recession. In the second quarter, Spain's economy still grew by 1.5% on a quarterly basis, thanks to strong growth in domestic demand and the revival of tourism. However, the third quarter looks set to be weaker than the second. The latest manufacturing PMI released last Friday showed that factory activity contracted in September due to high inflation and a falling number of new orders. The PMI index fell to 49.0 last month from 49.9 in August, staying below the 50.0 mark that separates growth from contraction. Also, consumer confidence fell again in September which does not bode well for consumption in the third quarter. For the third quarter, we expect a slowdown in the economy followed by a slight contraction in the fourth quarter. Year-on-year growth would then reach 4.3% over the full year. For 2023, we expect growth between 0 and 1% as the energy crisis will continue to weigh on the outlook. Read this article on THINK TagsTourism Spain GDP Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Weak industrial production and retail sales provide further evidence that the German economy continues to slide into recession Industrial production declined... Germany continues to descend into recession. In August, production in industry in real terms was down by 0.8% on the previous month on a price, seasonally and calendar-adjusted basis, from an upwardly revised stagnation in July. Over the year, industrial production was up by 2.1%. Ongoing supply chain frictions as well as the low water levels in German rivers were the main reasons behind this drop in industrial activity. To make things worse, production in the energy sector was down by 6.1% month-on-month and the construction sector by 2.1%. According to the statistical office, production in the energy-intensive sectors was down by 2.1% MoM and by 8.6% compared with February this year. Retail sales in August were down by 1.3%, from an increase of 0.7% in July. Read next: Great Britain Expects Positive Results For Its Economy | FXMAG.COM More to come German industry and the entire economy have not come to an abrupt stop but are rather in the middle of a long and gradual slide into recession. Some examples? At the start of the year, production expectations were close to all-time highs but since the start of the war in Ukraine they have gradually come down, with no end currently in sight. Order books were richly filled at the start of the year and companies were filling inventories. Since then, new orders have dropped in almost every single month, and actual production has weakened since the summer. We don't need a crystal ball to see a further weakening of German industry in the coming months. The full impact of higher energy prices will only be felt in the last months of the year. It is not only the price effect putting a burden on German industry but also the lack of industrial input goods (including industrial gas). Today’s data are like a sneak preview of more to come. High energy prices will increasingly weigh on private consumption and industrial production, making a contraction of the economy inevitable. The only question is how severe such a contraction or recession will be. Read this article on THINK TagsIndustrial Production Germany Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Volatile August production data should be taken with a pinch of salt as underlying developments continue to point to more accentuated weakness over 4Q22, when industry will very likely be confirmed as a drag on growth Car production line in Turin, Italy   According to Istat data, Italy's seasonally-adjusted industrial production increased a surprisingly strong 2.3% month-on-month in August (from an upwardly revised 0.5% in July). The working day adjusted measure posted a 2.9% year-on-year change (from -1.3% YoY in July). "August effect" possibly at play, in 3Q22 industry should remain a drag on GDP growth The broad aggregate breakdown shows that consumer and investment goods were the main drivers of the acceleration while the production of energy contracted. To be sure, this is a positive reading, but it should be taken with a pinch of salt, as the August release is often affected by marked volatility due to firm closures and their impact on seasonal adjustments. In order to get a sense of the underlying developments, we look at the moving quarter and note that over the June-August period, production contracted by 1.2% from the previous three months. Confidence and PMI data point to a deterioration in September While the August reading can still be partially interpreted as evidence that Italian industry continues to be relatively more resilient to international supply chain disruptions and to ballooning energy prices, we expect the picture to get gloomier over the coming months. The manufacturing PMI has been in contraction territory since July and business confidence plunged in September, with the expected production subcomponent down to levels not seen since November 2020. The set of measures recently put in place by the outgoing government to weather the energy inflation shock will help limit the damage for businesses but is unlikely to stop industry from becoming a drag on growth in both 3Q22 and 4Q22. The European Central Bank's tightening mode will not make things any easier over the next few months, possibly weighing on the investment component. A GDP contraction could still be avoided in 3Q22, not in 4Q22 After today’s reading we are mildly comforted in our view that the Italian economy might manage to avoid a contraction in 3Q22 (we expect a minor 0.1% GDP expansion) but remain convinced that this will not be possible in 4Q22, when we project a 0.5% quarter-on-quarter contraction, which should mark the start of a recession. Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The strong August reading does not fully reverse the losses from July, and expectations for manufacturing in the months ahead continue to weaken. Still, for the ECB this is another argument not to pivot towards a more dovish stance in the short run   Industrial production increased by 1.5% in August after a -2.3% drop in July. This was much better than expected but still does not erase losses from July. Ireland is experiencing very volatile production at the moment, which is affecting total eurozone numbers, but among the large industrial economies we see similar – though more muted – moves. France, Italy and Spain all experienced decent to strong growth in August, while Germany remained the exception with another month-on-month loss in production. This is the third consecutive month of declines in German production. Industrial production is generally volatile from month to month and therefore we do not think this is to be taken as the start of a recovery. All survey data and anecdotal evidence point toward a more significant slump ahead as demand is weakening and high energy costs are forcing businesses to slow production or stop it altogether in certain energy-intensive sectors. The upside risk to that view comes from improving supply chains, which could unlock some backlogs of production. Still, our base case is for the manufacturing sector to contract in the months ahead. Overall, while the outlook for production is weakening, this data in itself is no reason for the ECB to change tack in terms of its rate hike strategy. For a dovish pivot, the ECB would need to see evidence that the economy is contracting quickly. While a quarterly contraction in manufacturing is definitely a possibility, these August data are far from alarming. A 75bp hike in October is therefore very much on the table at the moment. Read this article on THINK TagsGDP Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Looking at all the evidence available so far, it looks like the eurozone fell into a shallow recession in the third quarter. For the European Central Bank, this is unlikely to be enough to prompt an immediate dovish pivot given its determination to hike interest rates in the face of double-digit inflation. We still expect another 75bp hike in October   A recession in the eurozone has now become the near-consensus view, with the IMF being the latest international institution to predict a contraction in the eurozone economy in 2023. The only question seems to be how severe this winter recession will be and when it will start. We take a look at whether the economy actually started to shrink in the third quarter. Soft data suggests that a recession is likely to have started During the pandemic, we developed a nowcast indicator that gave us insight into how the eurozone economy was performing during lockdowns. While it was designed to perform well in the specific circumstances of the pandemic, there is merit in looking at it once again. The big caveat is that electricity use is an important driver of the index, which has of course been subject to large productivity gains as the energy crisis has unfolded. Nevertheless, we see that the direction for most underlying variables is slightly negative at the moment, corresponding to a view that the economy fell into a mild contraction at the end of the third quarter. Nowcast tracker suggests that activity has been moderately declining recently For more on how this index is constructed, read here: https://think.ing.com/articles/introducing-the-ing-weekly-economic-activity-index-for-the-eurozone/ Source: ING Research   Mobility indicators are an important part of the nowcast index. When the economy reopened earlier in the year, we saw a strong increase. But except for workplace activity, most mobility indicators normalised during the spring and have remained at these levels over the course of the third quarter. Our average of the Google mobility indicators shows that the second quarter still saw large mobility gains, while the third quarter was flat. While seasonal factors may understate the performance in this regard, it does seem fair to assume that most, if not all, of the post-lockdown rebound is now behind us. Adding to meagre nowcast data, surveys suggest that a recession is likely to have started already. The composite PMI was below 50 – signalling contraction – for all three months of the third quarter. In fact, it gradually worsened as the quarter progressed, with September showing more serious signs of contraction as the summer months ended. Both services and manufacturing activity are now well below 50. This is a broader indicator of activity, which adds to signs that a shallow recession began in 3Q. Still, some evidence from data not collected from surveys would be useful so as not to miss out on positive surprises. Retail sales are weak and tourism is not expected to make up for it When looking at consumer spending, we see a clear downward trend in retail sales. November last year was the recent peak in sales activity after which a steady decline set in. This is because of the sharp decline in purchasing power that households have experienced since then, but will also be related to the reopening of certain services. With people returning to restaurants and bars and starting to take holidays again, spending patterns have shifted away from goods. The latter seems to be a smaller part of this though. As chart 2 shows, people are spending more than ever in retail, but volumes are down. So the impact of inflation is that people are forced to spend more and more at the store but take home less for it. Interestingly, car sales have been increasing in August, coming from a very low base. Consumers pay more in retail, but take home lower volumes than late last year Source: Eurostat, ING Research   The ECB put a lot of emphasis on the positive impact of tourism on third-quarter growth. This is a bit of a blind spot in terms of more frequent data and could indeed add to positive activity this quarter. Looking at overnight stays in the eurozone, we see that July and August were very close to pre-pandemic levels which suggests continued 3Q strength, but businesses are less optimistic. Surveys suggest that the peak in tourism activity was in June and that the summer may have slightly disappointed. Still, tourism is likely to have added positively to the third quarter GDP growth number. All in all though, it looks like the summer was not strong enough to have kept consumption growth positive overall. Industry limits losses so far due to improving supply chains, but trend is down When looking at industry, we see a divergence between the survey and hard data so far. While surveys suggest a sizable weakening in activity, August data was better than expected. It seems that the improvement in supply chain problems and the availability of inputs to production are allowing businesses to catch up on backlogs of orders. Still, new orders are falling and survey data suggests a weaker September. Particularly in energy-intensive sectors, production seems to have dropped again in September. The German statistical office has started to release a new times series for energy-intensive industry, showing that production in these sectors dropped by more than 8% between February and August. If September was indeed weaker than August, industrial production will have been negative on the quarter, adding to expectations that the economy was already in a shallow contraction in 3Q. Production recovered a bit in August, but energy-intensive sectors look problematic in September Right chart shows total manufacturing and the most energy-intensive sectors Source: Eurostat, Macrobond, European Commission DGECFIN, ING Research   Interestingly enough, trade is very difficult to judge at the moment. Data on volumes is hard to come by and strongly rising prices for energy have caused nominal imports to soar. It looks like real export growth weakened over the summer, but imports could have fallen even more as energy is such an important component and energy use is down due to high prices. This means that net exports could have actually contributed positively to GDP growth last quarter. If this makes growth positive, it would mean that a recessionary environment saw positive growth. Just as the US went through a technical recession in the first half of this year when the economy contracted but no real signs of recession were visible, so the eurozone could be in a technical expansion, where the economy expands in a recessionary setting. Contraction in 3Q, but no smoking gun for a dovish pivot from the ECB Taking this all together, we find enough weakness in recent data to believe that a recession has already started and stick to our forecast of a -0.2% quarter-on-quarter contraction in 3Q. But shallow negative growth – still held up by temporary recovery factors – is also unlikely to give the ECB the smoking gun for a dovish pivot. In fact, at the next ECB meeting on 27 October, there won’t be any new staff projections, nor will there be hard data for September, allowing the ECB to announce another hike by 75 basis points. It will take until the December meeting before the ECB has a better view on the severity of the recession, which should then be enough to embark on a dovish pivot. Read this article on THINK TagsGDP Eurozone ECB Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

While consumer inflation seems to be slowing down in the United States, looking at the CPI measure, the opposite is true in the Eurozone or the United Kingdom. Price growth continues to accelerate, according to data released today. What is the inflation rate in Europe? The annual inflation rate in the eurozone rose to 9.9 percent in September 2022, up from 9.1 percent a month earlier. This is the highest inflation rate since measurements began in 1991. Inflation has thus moved further away from the European Central Bank's 2 percent target, which may cause policymakers to continue tightening monetary policy despite the risk of recession. The main upward pressure for eurozone prices came from the energy sector (40.7 percent versus 38.6 percent in August), followed by food (11.8 percent versus 10.6 percent), services (4.3 percent versus 3.8 percent) and non-energy industrial goods (5.5 percent versus 5.1 percent). Annual core inflation, which excludes volatile energy, food, alcohol and tobacco prices, rose to 4.8 percent in September. On a monthly basis, consumer prices rose 1.2 percent, Eurostat reported. Source: Conotoxia MT5, EUR/USD, H4 Prices in the UK are also rising The UK's annual inflation rate rose to 10.1 percent in September 2022 from 9.9 percent in August, returning to the 40-year high reached in July and beating market expectations of 10 percent, trading economics reported. The biggest contributor to the increase was food, which became more expensive by 14.8 percent. Costs also rose sharply for housing and utilities, as they rose by as much as 20.2 percent, mainly, due to soaring electricity or gas prices. In contrast, core inflation on an annualized basis, which excludes energy, food, alcohol and tobacco, rose to a record 6.5 percent, compared to expectations of 6.4 percent, according to data from the Office for National Statistics. Source: Conotoxia MT5, GBP/USD, H4 High inflation in Europe - central banks with no way out? High inflation may not give much room for further action by central banks in the context of executing the so-called pivot, i.e. a turnaround in the current monetary policy, which consists mainly of interest rate hikes. Further price increases could seal further interest rate hikes in the Eurozone or the UK, which in turn could affect household budgets, but also company valuations. Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service) Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.

All eyes will be on the European Central Bank meeting next week. We think a 75bp hike looks like a done deal. The PMI survey on Monday will also be closely watched, providing clues on whether the eurozone economy has contracted even further. For the Bank of Canada, we expect a similar 75bp rate hike, given the upside surprise in inflation In this article US: The Fed cannot slow the pace of hikes yet Canada: a 75bp hike is the most likely outcome UK: Markets looking for clarity on fiscal plans and government stability Eurozone: ECB to hike by 75bp again amid ongoing inflation concern Source: Shutterstock   US: The Fed cannot slow the pace of hikes yet There are lots of important numbers out for the US next week, but none are likely to change the market's forecast for a 75bp interest rate hike on 2 November. 3Q GDP is likely to show positive growth after the “technical” recession experienced in the first half of the year. Those two consecutive quarters of negative growth were primarily caused by volatility in trade and inventories, which should both contribute positively to the 3Q data. Consumer spending is under pressure though while residential investment will be a major drag on growth. We are forecasting a sub-consensus 1.7% annualised rate of GDP growth. We will also get the Fed’s favoured measure of inflation, the core personal consumer expenditure deflator. This is expected to broadly match what happened to core CPI so we look for the annual rate to rise to 5.2% from 4.9%. With the economy growing and inflation heading in the wrong direction, the Fed cannot slow the pace of hikes just yet. Also, look out for durable goods orders – Boeing had a decent month so there should be a rise in the headline rate although ex-transportation, orders will likely be softer. We should also pay close attention to consumer confidence and house prices. The surge in mortgage rates and collapse in mortgage applications for home purchases has resulted in falling home sales. With housing supply also on the rise, we expect to see prices fall for a second month in a row. Over the longer term, this should help to get broader inflation measures lower given the relationship with the rental components that go into the CPI. Canada: a 75bp hike is the most likely outcome In Canada, the central bank is under pressure to hike rates a further 75bp given the upside surprise in inflation. Job creation has also returned and consumer activity is holding up so we agree that 75bp is the most likely outcome having previously forecast a 50bp hike. UK: Markets looking for clarity on fiscal plans and government stability The ruling Conservative Party has said it will fast-track plans to get a new leader in place by next Friday - and potentially even by Monday if only one candidate makes it through the MP selection round. Candidates have until Monday at 2pm to clear the hurdle of 100 MP nominations to make it onto the ballot paper, before Conservative MPs vote on the outcome. With only a week to go until the Medium Term Fiscal Plan on 31 October, there's inevitably a question of whether this is enough time for a new prime minister to rubber stamp Chancellor Jeremy Hunt's plans for debt sustainability. Investors are - probably rightly - assuming that Hunt will remain in position under a new leader. But the bigger question is whether the Conservative Party can unite behind a new leader and whether a more stable political backdrop can emerge - because if it can't, then not only is there uncertainty surrounding future budget plans, but also whether we're moving closer to an early election. Eurozone: ECB to hike by 75bp again amid ongoing inflation concern The hawks have clearly convinced the few doves left of the necessity to go big on rate hikes again. Contrary to the run-up to the July and September meetings, there hasn’t been any publicly debated controversy on the size of the rate hike. In fact, European Central Bank President Christine Lagarde seems to have succeeded in disciplining a sometimes very heterogeneously vocal club. To this end, it is hard to see how the ECB cannot move again by 75bp at next week’s meeting. As the 75bp rate hike looks like a done deal, all eyes will also be on other, more open, issues: excess liquidity, quantitative tightening and the terminal interest rate. Read more here. Besides the ECB, which will be the key focal point for eurozone investors, we’re looking at the survey gauges of the economy next week. The PMIs on Monday will be critical to determine whether the eurozone economy has slid further into contraction or whether an uptick has occurred. There is not much evidence on the latter in our view, but Monday will provide more clarity on how the eurozone economy is performing in October. Key events in developed markets next week Source: Refinitiv, ING This article is part of Our view on next week’s key events   View 3 articles TagsUS UK election Eurozone Canada Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The Spanish unemployment rate rose slightly to 12.7% in the third quarter, but is still very low. However, a sharp decline in hiring intentions shows that a cooling-off in the labour market is on the way. We expect unemployment to rise further in the coming quarters due to the deteriorating economic outlook, peaking at 14.3% in the third quarter of next year We expect unemployment to continue to rise in the coming quarters due to deteriorating economic conditions Unemployment rate slightly up in the third quarter According to INE figures released this morning, unemployment rose to 12.7% in the third quarter from 12.5% in the second quarter. With the exception of the previous quarter, this still puts unemployment at its lowest level since the third quarter of 2008, the start of the financial crisis. Although the unemployment rate is historically low, it is still well above the euro average. Eurostat's harmonised figures, which differ slightly from those published by INE, show that Spain's unemployment rate was 12.4% in August, compared with the eurozone average of 6.6%, a difference of 5.8 percentage points. For under-25s, the deviation from the eurozone average even runs to 12.7 percentage points. This average harbours large differences between regions. In the south of the country (Andalusia, Extremadura, Murcia etc) unemployment is typically above the national average, while the northern regions (Cantabria, Navarre, Catalonia, and so on) pull the average down a bit. We expect unemployment to continue to rise in the coming quarters due to deteriorating economic conditions. We predict that the Spanish economy will enter a mild recession starting in the fourth quarter of 2022 that will continue until the first quarter of next year. This will put some upward pressure on unemployment rates. Since unemployment rates usually lag somewhat behind the economic cycle, the biggest impact will be next year. We think that Spanish unemployment will peak at 14.3% in the third quarter of 2023. Unemployment rate, 1976-2022 Hiring intentions dropped sharply Although the labour market is still very tight, more signals point to a cooling in the coming months. The 12-month moving average of the number of vacancies has been stabilising for several months and seems to be at a peak. Business confidence has also deteriorated sharply in recent months, which will encourage companies to be more careful with new hires. This is already reflected in the latest Manpower survey, which polls every three months on the hiring intentions of companies. The latest results polling hiring intentions in the fourth quarter of 2022 show the largest quarterly decline in the index since the start of the survey in 2003. Although the index was historically high, this points to a turnaround in the labour market. The deteriorating economic outlook is already causing companies to be more cautious about hiring new people. Manpower survey – hiring intentions in the next three months, 2003-2022 A cooling economy will take longer to restore productivity to pre-Covid levels GDP per person of working age, a good measure of an economy's productivity, is still below its pre-Covid levels. Since 2014, following the financial crisis and debt crisis, the productivity parameter was on a strong remount. Between 2014 and 2019, GDP per working age population rose by an average of 2.6% per year. This came to an abrupt end with the onset of the Covid-19 pandemic. In the first two quarters of 2020, GDP per person of working age fell 24.2% from the last quarter of 2019 due to a sharp drop in activity. Afterwards, the measure recovered strongly. In each of the past three quarters, it grew more than 6% year-on-year but is still 3.5% below its 4Q19 pre-Covid levels. However, this increase is likely to be strongly driven by the activation of lower-productivity workers. This pushes GDP per person of working age higher, but puts pressure on real labour productivity per hour worked. We see that the latter has been under strong pressure since the beginning of this year (-3.1%). The end of Covid restrictions has allowed a lot of employees in the tourism and hospitality sector to get back to work, but these are typically employees who contribute relatively less to GDP. The tight labour market also makes it easier for less skilled and recent graduates to find a job – in general, these are also people with lower productivity. With activity again under strong pressure from the energy crisis and high inflation, productivity is likely to fall. Over the winter months, we forecast a contraction of 0.8% in the Spanish economy. As a result, it will probably take until 2024 before GDP per working age person returns to its pre-pandemic level. Productivity – GDP per working age population, Q4 2019 = 100 Spanish labour market supported by strong growth in open-ended contracts The high number of temporary contracts in Spain has long been one of the weaknesses of the Spanish labour market. According to Eurostat data, about 22% of Spaniards were on temporary contracts before the pandemic, compared to an average of 14.4% in the EU. However, the number of open-ended contracts has increased over the past year. The number of permanent employees reached a record high in the second quarter to 13.5 million employees (seasonally adjusted figures), an increase of 8.7% compared to the second quarter of last year. The number of employees on temporary contracts has fallen by 6.7% in the past year to just over four million. The increase started in the middle of last year but was accelerated by the labour market reform approved by the government in December. The share of permanent contracts has increased by three percentage points in one year, from 74% in the second quarter of last year to more than 77% in the second quarter of this year. It is too early to estimate the long-term effects of the labour market reform, but we can already say that the reform, which imposes additional restrictions on the use of temporary contracts, has resulted in many temporary contracts being converted into open-ended contracts. These also offer better protection during economic headwinds. A higher share of permanent contracts is also likely to mean that the rise in the unemployment rate, which usually follows a fall in economic activity, will be less pronounced than during previous recessionary periods. Share of permanent contracts Bleak economic outlook will lead to higher unemployment rate All in all, despite a slight rise in the unemployment rate in the third quarter, the labour market remains very tight. The bleak economic outlook, which is already prompting companies to be more cautious about new hires, will ease the pressure on the labour market in the coming months. We expect the unemployment rate to rise further to 14.3% in 3Q23, partly held back by a higher number of permanent contracts, before slowing down again. Read this article on THINK TagsUnemployment rate Spain Labour market GDP Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

EUR/USD is in a holding pattern ahead of today’s ECB rate meeting. In the European session, the euro is trading at 1.0068, down 0.16%. ECB projected to hike by 0.75% The ECB holds its policy meeting later today, amidst difficult economic conditions in the eurozone. Inflation jumped to 9.9% in September, up sharply from 9.1%. The manufacturing and services sectors are in decline and confidence levels are low. The markets have priced in a 0.75% hike and there has even been talk of a jumbo full-point increase. Could the ECB surprise with a lower-than-expected hike of 0.50%? Earlier this week, the Bank of Canada and Reserve Bank of Australia both delivered smaller hikes than expected, at 0.50% and 0.25%, respectively.  The message from both central banks is that they are close to ending their rate-tightening cycles and expect inflation to peak in the next several months. Read next: ECB is expected to hike by 75bp. USD is not that powerful at the moment, and it seems that a less hawkish move may be on the cards| FXMAG.COM Will the ECB follow suit? It’s possible but unlikely. The ECB only entered the tightening game in July, and the current benchmark of 1.25% remains out-of-sync with inflation, which is close to double-digits and the ECB needs to be aggressive if it hopes to beat inflation. The benchmark rates are much higher in Canada (3.75%) and Australia (2.60%) and have slowed economic growth, while the ECB’s low benchmark rate has not had the same effect. Still, the weak eurozone economy could tip into recession as a result of sharp rate hikes, which means that a 0.50% hike cannot be completely discounted. We can expect some movement from EUR/USD in response to the ECB decision – an increase of 0.75% or 1.00% will be bullish for the currency, while a 0.50% hike would disappoint investors and likely send the euro lower. EUR/USD Technical There is resistance at 1.0095 and 1.0154 0.9924 and 0.9814 are the next support levels   This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds. EUR/USD eyes ECB rate decision - MarketPulseMarketPulse

Italian consumers are feeling the pain of increasingly squeezed disposable income, and businesses worry that less demand - an increasingly important factor - is going to weigh on production Consumers in Italy are becoming increasingly pessimistic. Pictured: shoppers in Lazio Broad-based confidence decline in October points to contraction Early evidence is pointing to a contraction in Italy's economy in the fourth quarter. Today's consumer confidence data for October shows falls in all business sectors except services, taking it to the lowest level since March 2013. It has to be said that the jury's still out as to whether the Italian economy managed to avoid a contraction in the third quarter; we'll get the flash estimates for that on Monday.  The five-point fall in consumer confidence was driven by a steep decline in the difficulties people have in purchasing durable goods and saving for the future. The prospect of unemployment is also a big concern as is a general worry about current economic conditions. The re-opening effect after Covid lockdowns, which helped consumption over the first half of the year and part of the summer, is now coming to an end as confirmed by the steep fall of confidence among tourism businesses. The ongoing compression in real disposable income is the most obvious macro driver. As price expectations among businesses continue to point higher (with the exception of manufacturers) the real disposable income effect looks set to remain in place, barring unlikely generous wage concessions. Admittedly, firms are not showing clear intentions to shed workers right now and employment should continue acting as something of a shock absorber, at least in the short term.  Manufacturers increasingly point to insufficient demand The further decline in manufacturing business confidence is hardly surprising. Interestingly, manufacturers' responses are signalling that demand constraints are again at play. Orders, and particularly the domestic component, are slowing down, stocks of finished products are increasing and the level of current production is declining. For the first time since the first quarter of 2021, insufficient demand is perceived as a stronger obstacle to production than the availability of plants and materials, typical supply factors. This means that a further easing of existing supply constraints in global value chains might not automatically translate into higher production in a deteriorating demand environment. In the manufacturing domain, producers of investment goods seem to be faring better, suggesting that the demand flow originated by the implementation of the recovery and resilience facility is still playing out. GDP contraction in the last quarter seems inevitable Today’s confidence data suggest that an economic contraction in the fourth quarter of this year will be almost impossible to avoid. On the demand side, this will be driven by the evaporation of the re-opening effect (often related to tourism) and by the compression of real disposable income, which will likely translate into softer consumption. From the supply side angle, both industry and services now look likely to act as a growth drag in the quarter.   We are pencilling in a 0.5% GDP contraction in 4Q22, with average GDP growth of 3.4% for the full year.   Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

We do not expect any further CNB interest rate hikes. The new forecast should show lower inflation but also higher wage growth. The cost of FX intervention is low enough to continue to play a major monetary policy role. However, together with high wage growth, they remain for us as the main risk of a potential additional rate hike The Czech National Bank in Prague Lower inflation gives doves enough buffer The third monetary policy meeting under the new CNB leadership will take place on Thursday next week. We expect interest rates to remain unchanged. Thus, the central bank's new forecast will be the main focus. Compared to the August forecast, we see the biggest deviation in inflation, which surprised to the downside. In September, this deviation came in at 2.4 percentage points. Therefore, here we can expect the biggest downward revision in the new forecast. The government's new energy measures should also come into play to bring inflation down artificially. However, given the statistical office's unclear approach, the question is how the CNB will take into account this change. On the other hand, wage growth surprised to the upside by 1.7pp in the second quarter compared to the CNB forecast. Moreover, the monthly numbers show a further acceleration in the third quarter. In doing so, wage growth has become the main focus of the board as a reason for a potential additional interest rate hike. 7.00% CNB's key policy rate We expect no change next week   Nevertheless, the interest rate forecast can be expected to remain roughly similar to the CNB's summer version, indicating a rate cut already in the next quarter due to the nature of the central bank's model. On the FX side, we don't expect much change in the forecast weakening trajectory of the koruna under the pressure of the declining interest rate differential. However, we don't see much implication for FX interventions, which are fully decoupled from the CNB forecast and depend only on the discretionary decision of the board. But, at the moment, we see the CNB in a comfortable position with no reason to change anything about the current regime. CNB summer forecast Source: Macrobond, ING forecast We see little risk of a rate hike in the future, but remain vigilant In the long run, we do not expect any further CNB rate hikes. Despite the board's highlighting of the wage-inflation risk, we believe that the stability or decline in annual inflation combined with a weaker economy will be enough in coming months for the CNB to confirm the end of the rate hike cycle at future meetings. In the meantime, the main monetary policy tool will remain FX intervention, the cost of which we believe is low enough for now (around 19% of FX reserves). However, while we see the risks of additional rate hikes as low, we think the key will be the further development of wage growth and the cost of FX intervention, which we will monitor closely in the coming months. Czech FRA curve expectations Source: Refinitiv, ING What to expect in rates and FX markets The market retains a small chance (less than 50%) of a rate hike at the next meeting or possibly at subsequent meetings until the end of the first quarter of next year. Market expectations are that the CNB should then start cutting rates in the second half of 2023, later than we expect. However, given the CNB's current limited communication regarding next year, we do not see much opportunity at the short end of the curve. Therefore, we prefer to look at the long end, which we believe reopens the opportunity for ratepayers thanks to the current global rally, and next week's CNB meeting could bring tempting levels due to the central bank's dovish tone. On the bond side, Czech government bonds (CZGBs) have cheapened significantly, but we see that there is still a need to cover high financing needs this year and recent fiscal headlines are also not supporting buyers. Moreover, we expect the global sell-off to continue after the temporary current pause, which will bring further pain to the Czech bond market. However, we remain constructive and believe that the moment for buyers will come when funding strategy becomes clearer in the deluge of budget changes. In addition, the risk of a sovereign rating downgrade has been averted for this year, which may attract investors back into CZGBs at the end of the global sell-off. On the FX side, the CNB remains the main driver, remaining active in the 24.60-70 EUR/CZK levels according to our estimates. The market can be expected to build short koruna positions again ahead of next week's meeting in anticipation of changes in the FX regime. However, we do not expect any changes and anticipate a similar scenario after the CNB meeting as in the case of the last two meetings, i.e. liquidation of short positions and a stronger koruna. Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The Spanish economy grew by 0.2% Q-on-Q in the third quarter, a significant slowdown from the 1.5% we saw the previous month. A strong tourism season helped stop the growth figures from turning negative Spain has had a good tourism season Spain's economy slowed sharply in the third quarter Spain's economy still grew by 1.5% on a quarterly basis In the second quarter, thanks to strong growth in domestic demand and the revival of tourism. However, growth slowed sharply to 0.2% QoQ. In the manufacturing sector, economic activity stagnated. While manufacturing recorded growth of 1.7% QoQ in the previous quarter, it fell to just 0.1% in the third. The services sector also slowed significantly from 1.6% to 0.7%. The leisure sector still recorded strong growth rates (7.6% QoQ), mainly thanks to a strong tourist season. The tourism sector, contributing 14% of total GDP in 2019, has held up much better than the rest of the economy so far and positively contributed to the growth figures. Economy is likely to fall in a recession over the winter months The latest figures suggest the economy is likely to contract in the fourth quarter. Both manufacturing and service sector PMIs fell below 50 in September, signalling contraction. New orders were again noticeably down in September as the high inflation and bleak economic outlook weighed on demand. There is little improvement in sight as Spanish consumer confidence fell again in September. The index stands below the Covid-19 pandemic low illustrating that Spaniards are increasingly worried about high inflation. Also, tourism, which contributed positively to growth figures in the second quarter, is starting to show signs of weakening. While the number of international visitors in July was still at 92% of its pre-pandemic levels, this dropped to 87% in August. The slowdown in domestic tourism was even greater than that of foreign tourism. The number of hotel stays booked by residents fell to 101% of pre-pandemic levels in August, from 107% in July. On the other hand, the aid packages, amounting to 30 billion euros or 2.3% of Spanish GDP announced by the government last month will bring some relief. We forecast a mild recession for the Spanish economy in the next 2 quarters. Thanks to the strong first half of the year, GDP growth will still come in at 4.3% in 2022, but for 2023 we are now looking at 0.3% growth. Read this article on THINK TagsTourism Spain PMI GDP Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Spanish inflation fell in September to 7.3% from 8.9% in September, marking the third consecutive month of decline. The main driver is the fall in the energy component Spanish inflation falls to 7.3% in October Spanish inflation fell to 7.3% in October from 8.9% a month earlier. This is now the second month in a row in which inflation has fallen. Core inflation, excluding more volatile energy and food prices, remained flat at 6.2%. The decline in headline inflation is mainly due to a drop in energy prices. This translates into a significant drop in the energy component. Clothing and footwear prices also rose more moderately than last year, reducing headline inflation, albeit to a lesser extent. From 1 October, the Spanish government reduced VAT on gas from 21% to 5% to soften the inflation shock. However, according to our calculations, this had only a marginal effect on the CPI of 0.1 percentage point. Many factors ease inflationary pressures, but the decline will be very gradual There are many structural factors easing some of the pressure on inflation. Many commodity prices have already fallen sharply from their peak levels a few months ago. Container transport prices have also fallen significantly, and supply chain problems continue to ease. These factors point to less inflationary pressure in the pipeline. Much will also depend on the development of energy prices. These have recently fallen sharply from the peak in August thanks to favourable weather conditions, but the question is how long this will last when winter really starts. Due to all these factors, producer price inflation has also already fallen from 47% in March to 36% in September but is still very high. This ensures that transmission to consumer prices also starts to weaken, and that will continue as the economy slips into recession. Cooling demand will continue to ease inflationary pressures as it will become more difficult for companies to pass on higher prices to the end customer. Although still historically high, the number of companies planning to raise prices further also shows a downward trend in a wide range of sectors. Price selling expectations only continue to edge higher in food and consumer goods.  This shows that inflationary pressures will remain high in the coming months and only very gradually start to ease. For the full year of  2022, we forecast inflation to reach around 8.7%. In 2023, inflation will gradually start to come down, reaching 4.4% in 2023. Read this article on THINK TagsSpain Inflation Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

We suspect that a combination of post-Covid re-opening and tourism effects was at play, possibly with the support of investments. We still expect a short recession to start in 4Q22 A good recovery in domestic and international tourism helped boost Italy's second-quarter GDP Italian economy decelerating, but well clear of contraction in 3Q22 The flash estimate just released by Istat shows that Italy managed to avoid contraction in 3Q22. We had expected a positive reading, but the 0.5% QoQ gain (was 1.1% QoQ in 2Q) is clearly a positive surprise. The 2.6% YoY gain (was 4.7% in 2Q22) marks a clear deceleration, which looks set to continue ever the next few quarters. As usual at the preliminary estimate stage, no detailed demand breakdown was released but the indication is that domestic demand (gross of inventories) provided a positive contribution to quarterly growth, while net exports acted as a drag. On the supply side, value added contracted over the quarter in agriculture and industry and increased in services. The tail effects of re-opening and positive tourism numbers likely the main drivers Today’s release confirms our belief that the re-opening effect and a very positive tourism season were still powerful growth drivers in the third quarter of 2022. We suspect that detailed demand data will eventually show positive contributions from both consumption and, possibly, investments, the latter helped by the support of European recovery funds and generous domestic tax investments in the construction domain. A contraction in 4Q22 still looks hard to avoid Looking forward, we remain convinced that a GDP contraction is hard to avoid in 4Q22, opening a short-lived recession which looks set to end by 2Q23 . Confidence data headed further south in October, including in the tourism sector. Households are gloomier as disposable incomes are increasingly eroded by accelerating inflation and with a backdrop of slowly growing wages. The new government will likely prioritize a new wave of compensatory measures, but these will mostly refinance expiring ones and so limit damage rather than inducing a turnaround. Statistical carryover for 2022 GDP growth is now at 3.6%. Taking into account the 0.5% contraction that we are currently penciling in for 4Q22, we would end up with average GDP growth of 3.5% in 2022. Keeping our previous profile for 2023 unaltered, we now look for average GDP growth of 0.2% in 2023. Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The Portuguese economy performed much better than expected in the third quarter, growing 0.4% while the labour market remained very tight. However, the inflation shock has deepened, reaching double digits in October for the first time Source: istock Growth accelerates in 3Q Portuguese GDP grew 0.4% quarter-on-quarter in the third quarter, an improvement on the 0.1% growth in the second quarter. Despite high inflation, private consumption increased, allowing domestic demand to make a positive contribution to the growth figures. Tourism, which represented about 15% of GDP before the pandemic, also remained a powerful growth driver. Overnight stays were 2.9% above pre-pandemic levels in 3Q, thanks to a strong rebound in domestic tourism (+10.8% from 3Q19). This offset the slightly lower number of stays booked by international tourists (-0.8% compared to 3Q19).  Read next: Ferrari And Still High Demand | Tips For Money Managing| FXMAG.COM High inflation continues to trigger concern for both businesses and consumers, which will cause the economy to cool considerably towards the end of the year. The latest indicators are already pointing to a deterioration in the economic outlook, likely pushing the economy into a mild recession from the fourth quarter onwards. Consumer confidence declined further in October and is now at its lowest level since the start of the pandemic. Business confidence also fell once again across almost all sectors. In addition, funds from the EU’s Recovery and Resilience Facility (RRF) will now be lower than initially anticipated, although support measures announced by the government are expected to cushion the blow. In early September, the Portuguese government announced a support package to help households cope with rising inflation. Together with measures taken previously, this is estimated to amount to around 1.5% of GDP. Inflation hits double digits in October The inflation shock is getting worse, which is likely to put pressure on household consumption. Inflation rose sharply again in October to 10.2% year-on-year from 9.3% in the previous month, reaching the highest level since May 1992. In the space of just one month, prices rose 1.3% (up from 1.2% in September). The main drivers were the energy and food components within the inflation basket. However, the sharp rise in core inflation from 6.9% to 7.1% shows that energy and food are not the only drivers and that inflation is increasingly spreading throughout the Portuguese economy. This is likely to increase further over the coming months as the spillover effect of high energy and food prices on other sectors persists. Price expectations in industry and trade rebounded significantly in September and October, although they had fallen slightly from their peak levels before summer. This shows that, despite the recent fall in gas prices, inflationary pressures will remain high and it will probably take until early next year for Portuguese inflation to fall below 10%. Jobless figure slightly up in September In September, unemployment stood at 6.1%, 0.1 percentage points higher than in August. Despite the slight increase in the overall unemployment rate, the labour market remains very tight. In particular, employers in the tourism and construction sectors are struggling to fill vacancies. Hiring intentions also remain intact for now, with a recent survey by Manpower reporting historically high figures for expectations from Portuguese companies for the fourth quarter. Despite a slight decrease from the previous quarter, the overall health of the labour market remains strong. If growth stalls further during the winter months, unemployment is likely to rise, but any increase is expected to be modest. All in all, we still expect a year-on-year growth rate of 6.6% in Portugal thanks to a strong start to the year and a solid contribution from tourism, which has now seen a full recovery from the pandemic. High inflation and economic uncertainty will likely dampen investment and consumption over the winter months, but government support is expected to cushion the impact. Read this article on THINK TagsUnemployment rate Portugal Inflation GDP Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

In the second quarter of 2022, Spanish property prices rose again by 8.0% year-on-year. Rising mortgage rates and a weakening economic outlook will dampen price growth from an expected 7% this year to 1% in 2023 House prices have risen sharply across most of Spain Strong price growth continues, although we are past the peak Spanish home prices rose 8.0% in the second quarter compared to the same period last year, a slight cooling compared to the first quarter of 2022, but price growth is still well above its historical average. On a quarterly basis, prices rose 1.9% in the second quarter compared to 2.6% in the first quarter. New and existing home prices showed similar trends, although the former rose slightly more strongly (+8.8% year-on-year) than the latter (+7.9% YoY). Figures from Tinsa, which include a monthly profile and are well correlated with the INE quarterly index, show a weakening trend over the summer. In July, Spanish house prices still rose by 3% month-on-month, but this slowed down to a growth of 0.5% MoM in September. The start of the Covid-19 pandemic has turbocharged price growth in many countries. Since the start of 2020, prices of existing dwellings in Spain have increased by 11.5%. This is slightly weaker than price growth in Portugal (+26.2%) and France (+15.5%), but stronger than in Italy where prices have risen by 7.2% since the outbreak of the pandemic. These strong price dynamics during the pandemic stretched affordability to the limit. Combined with a cocktail of rising mortgage rates, deteriorating economic prospects and high inflation eroding household purchasing power, the real estate market will continue to cool. We expect price growth to reach 7% in 2022, but slow to 1% next year. This means that nominal price growth will not be able to keep up with inflation. With a current expected inflation rate of 8.7% for this year, real price growth will turn negative at -1.7%. At an expected inflation rate of 4.4%, real price growth in 2023 will also be negative at -3.4%. Fig. 1. House price index, % YoY INE, ING Research Price growth starting to cool everywhere except in the metropolitan areas Although house prices have risen sharply in almost all of Spain, there are varying dynamics across regions and cities. The latest Tinsa figures for September show that price growth is beginning to cool off everywhere except in the metropolitan areas. Price dynamics have slowed down the most on the Mediterranean coast and in the Balearic and Canary Islands. Price growth of 6.5% on the Mediterranean coast and 3.5% in the Balearic and Canary Islands was well below the national average. On the Islands, in particular, price growth has come to a complete halt this year, even declining slightly over the summer. The cooling off does, however, come after strong price growth at the start of the pandemic. By comparison, in metropolitan areas, price growth continues unabated for now. Although house prices in the rest of Spain fell by an average of 0.4% compared to August, in metropolitan areas they still rose by 1.2% in one month, bringing the total annual growth rate in September to 10.0%. Fig 2. House price index, % YoY, Sept '22 Tinsa, ING Research Higher mortgage rates inhibit future price growth Mortgage rates have already risen sharply since the beginning of the year, and it’s unlikely that we have reached the peak yet. Mortgage rates closely follow the evolution of the 1-year Euribor, with a small lag. The 1-year Euribor has started to rise sharply. While the Euribor was still negative at -0.5 on 1 January, it rose to 2.7 in October. Although the 1-year Euribor already anticipated interest rate hikes by the European Central Bank (ECB) to combat inflation, further rate hikes could put some upward pressure on the Euribor again in the coming months. Nevertheless, we expect the Euribor to peak toward the end of the year. If the eurozone falls into recession, the ECB's willingness to raise interest rates further will also decrease. Mortgage rates, which have also risen sharply this year, are likely to follow suit. The gap between Euribor and mortgage rates has narrowed significantly recently, suggesting that mortgage rates have yet to catch up. However, the biggest upside risk lies with floating rates. Although the gap between fixed and floating rates has narrowed significantly recently, floating rates tend to be well above fixed rates. Consequently, increases in floating rates will be more outspoken, while they will be more moderate for fixed rates. We expect mortgage rates to rise to around 3.4-3.6% for fixed rates and 3.9-4.1% for variable rates early next year before stabilising at their higher levels. These higher mortgage rates, which reduce households' borrowing capacity, will dampen housing demand and price growth. Fig. 3. Fixed and floating rate of new loans for house purchase & Euribor 1Y BDE, ING Research Growing popularity of fixed interest rates continues In the past, almost all mortgage loans had variable rates, but the number of new fixed-rate mortgages has been rising sharply since 2015. According to INE data, before 2015, the share of new fixed-rate loans was less than 5%, while accounting for more than half of all loans since 2021. Many Spanish homeowners have taken advantage of the low-interest rate environment in recent years to lock in their loan costs. The prospect of further interest rate hikes by the ECB and increasing uncertainty accelerated this trend. In July, three-in-four mortgage loans were at a fixed rate, which protects households from the sharp rise in mortgage rates as their monthly repayment burden remains stable. This keeps their creditworthiness intact, reducing the risks to the banking sector. Despite the popularity of fixed rates, floating-rate loans still represent the vast majority of total outstanding mortgages. Fig. 4. Share of mortgage loans for dwellings with a fixed vs floating rate INE, ING Research Transaction data remain strong, but we expect momentum to slow The sales figures for August recently published by INE do not (yet) show a weakening in the number of transactions. The number of transactions in August 2022 were still almost 15% higher than in the same month last year, which was already an exceptionally strong year in terms of transactions. If we compare with the pre-Covid period, the number of transactions in August was still 60% and 28% higher than in August 2019 and 2018, respectively. For the coming quarters, we expect the number of transactions to start declining. The cost-of-living crisis is putting strong downward pressure on real disposable income, combined with rapidly rising mortgage rates and weakening economic growth, which are creating strong headwinds for the property market. We expect the Spanish economy to dip into a mild recession from the fourth quarter onwards. Fig. 5. Number of transactions, 2019-August 2022 INE, ING Research Mortgage production still well above pre-Covid levels Despite higher mortgage rates, mortgage production is holding up well for now. In the first eight months of this year, 14% more mortgages were issued than in the same period last year, and 2021 was already a strong year in terms of mortgage production. If we compare this to 2019, the year before Covid-19, the number of new mortgages in 2022 is up to 24% higher. In August, the last month for which figures are available, the number of new mortgages was still 10.9% higher than the same month last year. It is likely that many homeowners still took advantage of low interest rates in the first half of the year to refinance their existing mortgage loans at a fixed rate. Potential homebuyers also probably tried to get ahead of rising interest rates by accelerating their property purchases. Both factors will have boosted mortgage production in the first half of the year, but this effect will gradually diminish. Furthermore, increasing household pessimism and less favourable credit conditions will dampen demand for real estate, putting downward pressure on mortgage production. Consumer confidence has deteriorated significantly in recent months, which shows that households are increasingly concerned about high inflation amid economic uncertainty. Consumer confidence has now fallen below the low seen at the beginning of the pandemic, and is now at its lowest level in almost 10 years. This could prompt potential home buyers to postpone their purchase decision in the coming months. The latest European Commission survey that gauges Spaniards' buying intentions to buy a home in the next 12 months is holding up much better for now than in other European countries, but has also weakened somewhat over the past year. During the Covid pandemic, the index had risen to its highest level since 2010. Although the index is still historically high, we see a downward trend in 2022. Fig. 6. Mortgage production for dwellings, 2019- August 2022 INE, ING Research Strong household growth and falling supply are likely to support price growth On the other hand, structural growth in the number of households will support the real estate market over the coming years. Due to strong household thinning, the number of households is increasing faster than population growth, which supports the demand side of the real estate market. Over the past 20 years, more than 20 million households have been added, a 70% increase. Between 2002 and 2012, the number of households increased particularly sharply with an average annual growth rate of 2.4%. The growth rate has slowed to an average of 0.4% per year over the past decade, but has continued unabated. In the years ahead, household growth will continue to support the real estate market. INE forecasts that the number of households will increase by 1.1 million by 2035, a 5.3% increase in 13 years. This is mainly due to strong growth in the number of single and two-person families. These two groups are expected to grow by 16% and 11%, respectively, while the number of households with more than three people will shrink by about 5%. Spain already has a high proportion of flats (66%), compared with, for example, France (34%), Italy (55%) and Portugal (46%), but this proportion is likely to increase further over the next decade driven by a growing number of singles. In 2035, single people will account for 29% of all households, up from 26% in 2022 and 20% in 2002. Moreover, supply is rising less rapidly than the number of households, which naturally puts upward pressure on prices. Between 2011 and 2021, the number of households increased by 5.4%, while the housing stock increased by only 2.9% over the same period, according to figures from the Ministry of Transport. For this year and next, we forecast a further decline in construction volumes, which will put additional pressure on the property market. The sharp rise in the cost of building materials puts an extra brake on construction activity. Production levels are currently more than 20% lower than before the Covid pandemic and we expect the sector to shrink for the fourth year in a row. For next year, we expect some marginal recovery. The upward trend in costs seems to have slowed. In addition, the Spanish construction sector will see some positive effects from investments in the EU recovery funds. Nevertheless, the number of households is also expected to continue to grow faster than the property supply in the coming years, fuelling price growth.   Fig. 7. Evolution of the total number of households, 2002-2035 INE, ING Research Affordability under pressure, especially for low-income earners Property market inequality is relatively low in Spain. Compared to other European countries, home ownership in Spain is relatively high among low-income earners. According to Eurostat data, 73% of households in the lowest quintile are homeowners; only Hungary (78%) and Slovakia (80%) score better, and the proportion is much higher than in, for example, Italy (48%), Portugal (61%) and France (33%). The gap between the bottom and upper quintile is also much lower than in other European countries. However, the strong price increases in recent years combined with higher mortgage interest rates and declining purchasing power due to high inflation have put pressure on affordability, especially for lower-income earners. The housing cost overburden rate, or the proportion of the population living in households that spend 40% or more of their disposable income on housing, was 9.9% in 2021 compared to 8.2% in 2020. This is well above many other European countries, including Italy (7.2%), France (5.6%) and Portugal (5.9%). Fig. 8. Homeownership across the income distribution OECD, ING Research Increasing focus on energy efficiency Rising energy prices and high energy bills are a game-changer, including in the real estate market. We expect that when purchasing a home, more attention will be paid to energy efficiency, which will influence price trends. The price differences between energy-efficient homes and energy-wasting homes will increase in the coming years. There is increasing evidence from different countries of a clear relationship between the energy efficiency of a property and transaction prices. A one-letter improvement in a property’s energy performance certificate (or EPC) is estimated to increase the price by 8% in Austria, 4.3% in France and 2.8% in Ireland. In Belgium, research shows that a significant improvement in energy efficiency is associated with a 4.3% higher (advertised) price. Also, in Portugal, there is a significant relationship between eco-friendly dwellings (EPC value of A or B) and the median sales value per m². Most of this research predates the sharp rise in energy prices this year. Therefore, we expect these effects to have increased significantly by now. In Spain, there is no convincing scientific evidence (yet) that houses with a better energy label (A or B) are sold at a higher price. Owners and sellers have no incentive to disclose their EPC score. As a result, houses with low energy scores can be sold at the same price as houses with good energy scores. Although generally favourable, climate conditions play in Spain's favour compared to more northern European countries (though cooling might become an issue if the climate warms up further), so the importance of energy efficiency for both home buyers and sellers will continue to increase, which will also lead to price differences in Spain. Sellers of energy-efficient homes have a strong competitive advantage that they can exploit. Anecdotal evidence also shows increasing interest in energy efficiency among home buyers. The more energy-efficient the home, the more it can reduce energy bills and thus generate savings. Moreover, increasingly stringent regulations will further accelerate the turnaround in the coming years. We anticipate a soft landing in 2023 Although we expect a further cooling of the Spanish real estate market, a severe correction is unlikely. We expect the price level to be close to a peak and may fall slightly over the next two quarters. Currently, we expect a slight price drop during the winter months before recovering. In this way, we still arrive at 7% price growth for 2022 and 1% for 2023, considerably less than inflation. Real price growth will turn negative, expected to be -1.7% for this year and -3.4% for next year. Uncertainty, rising interest rates and a looming recession will dampen price growth. We expect the Spanish economy to fall into a mild recession from the next quarter onwards, which also makes the labour market outlook less rosy. Moreover, household purchasing power is already under severe pressure from high inflation and energy prices. While the prospect of rising interest rates may temporarily cause households to speed up their buying process to get ahead of rising interest rates, this effect will gradually disappear. On the other hand, demand for property remains strong (for now). Both the number of transactions and mortgage production are still at very high levels. A supply that increases less rapidly than the number of households will continue to put upward pressure on prices. Spanish house prices have risen less rapidly than in most other European countries, which also makes a correction less likely. Read this article on THINK TagsSpain Housing transactions Housing Prices Housing market Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Another plunge in industrial orders shows that last week's positive GDP growth reading was a last hurrah for the economy. The slide into recession continues German industrial orders just took another sharp hit, plunging by 4% month-on-month in September, from -2% MoM in August. On the year, industrial orders were down by almost 11%. Since the start of the year, German order books have shrunk by almost 15%. At the start of the year, German industrial order books were richly filled and provided decent anti-recession insurance. Since the start of the Ukraine war, however, this insurance has lessened by the month. Last week, surprisingly strong GDP growth for the third quarter might have given the impression that the German economy could defy recession. This year’s order book deflation, however, sends a clear signal that these signs of hope are illusionary. The long slide into recession continues. Read this article on THINK TagsIndustry Germany GDP Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The downturn in the Spanish economy continues unabated. Both the services and manufacturing PMI remained below 50 in October, signalling a contraction. The PMIs clearly show that the Spanish economy is slipping into a winter recession The decline of the manufacturing sector in Spain seems to be accelerating Falling number of new orders in both manufacturing and services sectors The services PMI was better than expected, but remains below the neutral level of 50, signalling a contraction. The PMI index rose to 49.7 in October from 48.5 in September. However, we do not expect the rebound to continue in the coming months. The number of incoming orders fell again as households and businesses postponed their buying decisions due to high inflation and uncertainty. More worrying is the evolution in the manufacturing sector. The manufacturing PMI already fell much more sharply than expected on Wednesday, from 49 in September to 44.7 in October, deep into contraction territory. Both production and new orders fell sharply, at a pace not seen since the start of the Covid-19 pandemic or the debt crisis in 2012. In fact, the decline of the manufacturing sector seems to be accelerating. These figures do not bode well for the development of industrial production. INE figures released this morning show that industrial activity in September has already fallen by 0.3% month-on-month. The PMI figures for October already show that we can expect a solid fall in industrial production next month as well. Recession during winter months seems inevitable Despite better-than-expected inflation figures last week, the economic situation is deteriorating very fast. A recession, meanwhile, seems inevitable. Although little data is yet available for the fourth quarter, we assume a contraction of 0.5% quarter-on-quarter in the last quarter of this year. This brings annual growth for 2022 to a still very good 4.3%. However, for 2023, we expect the Spanish economy to grow by only 0.3% year-on-year. High inflation and energy prices combined with higher interest rates and greater uncertainty will dampen demand and investment, putting downward pressure on the growth figures. Read this article on THINK TagsSpain GDP Services PMIs Manufacturing production Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Eurozone retail sales grew by 0.4% month-on-month in September, rounding out a disappointing quarter for sales. We see a continued cloudy outlook for retail as spending power remains under pressure and confidence is still near record lows A modest increase in retail sales in September rounded out a disappointing third quarter in terms of consumer spending. While there were some upside surprises to be noted, the consumer in general has started to reign in spending as the cost-of-living crisis continues and reopening effects from the pandemic fade. The effect of inflation is very apparent in retail sales as consumers bought -2.6% lower volumes in September than in June of last year but have spent 8.1% more. Netherlands and Germany led the way with 1.3 and 0.9% month-on-month increases respectively, while France, Italy and Spain all saw more or less stable retail trade compared to last month. The outlook for retail remains bleak, with ongoing inflation eating into consumer spending power and uncertainty about the economy increasing. This has resulted in record-low consumer confidence over recent months. While that is not necessarily a strong predictor of household consumption, movements as pronounced as this have always been associated with a contraction in consumption. We expect consumption to contract in the current and coming quarter, followed by a very modest recovery. Read this article on THINK TagsRetail sales GDP Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

According to the latest estimates, Eurozone industrial production added 0.9% for September and 4.9% y/y. The figures are much better than the expected +0.1% m/m and 2.8% y/y, showing that the euro-region economy is in no hurry to slip into recession despite high energy prices. The seasonally adjusted index was at its highest level in almost five years, remaining within the framework of multi-year global stagnation. The apparent reason for the sector's resilience is the massive backlog of orders formed on the back of the easing of pandemic restrictions. There are two sides to the solid industrial production figures in the Eurozone. The strong figures for September create a high base from which a further decline may seem particularly deep and painful. On the other side, they show the relative vitality of the European economy and its positive reaction to the collapse of the euro. In absolute terms, the Eurozone recession may not be as deep as feared a few months ago, despite high energy costs and a sharp rise in the ECB rate. We note that commodity prices have fallen significantly in recent months. A relatively strong economy by the start of the extreme hike cycle forms more room for an ECB rate hike, which is suitable for the euro. The EURUSD will likely face a few obstacles for the upside up to the area of 1.0400-1.0430, where the 200-day MA and the support of the pair in May-June are concentrated. Here, the pair could face local profit-taking, and there will be a fierce tug-of-war between the dollar bulls and the bears in the markets.

Dutch GDP declined in the third quarter of 2022 by a mild -0.2% compared to the second quarter, in line with expectations. The contraction was driven by a decline in investment and is expected to develop into a mild recession The third-quarter GDP figure for the Netherlands signals the start of a mild technical recession -0.2% GDP growth rate 3Q22 (QoQ) As expected GDP decline mainly caused by a fall in investment The decline in Dutch GDP was in the ballpark of ING forecasts. Investment was the biggest drag on growth, with gross capital formation falling by -1.7% compared to the second quarter. Expenditure volumes fell due to fewer purchases of transport equipment (-11.3%). Investment in housing (-2.7%), non-residential buildings (-1.7%), infrastructure (-1.7%) and intangible assets (-0.4%) also fell. While demand for (the construction of) housing is generally strong in the Netherlands and the government is ambitious with investing in several types of infrastructure, environmental regulations and insufficient administrative capacity limit the number of building permits. Investment in ICT equipment (3.8%) and machinery and other equipment (2.6%) still expanded. Government consumption dropped by a minor 0.1%, while the consumption of households stagnated – rising by just 0.1%, somewhat better than expected. While the consumption of services, durable and other non-food goods fell in an environment of higher prices and record low consumer confidence, the consumption volumes of food and tourism abroad rose. Accelerating wages, a tight labour market with low unemployment, high amounts of deposit savings among wealthy households (mostly built-up during Covid-induced lockdowns), the certainty provided by the announcement of fiscal support for households in light of the energy crisis, and an eagerness to go on holiday abroad with few Covid-restrictions may explain why consumption volumes of households have not yet collapsed. Dutch exports continue to perform surprisingly well given the worsening international trade environment, with growth of 0.9%. Goods exports expanded by 0.5%, with both domestically-produced goods exports and re-exports showing a positive development. Service exports expanded by 2.3%, at least partially driven by increases in incoming foreign tourism. Imports (1.0%) showed similar growth as exports. Imports of services increased by 1.9%, while goods imports expanded by 0.8%. The overall net contribution of international trade to GDP growth was close to zero (0.05%-point) in the third quarter. Decline in the financial sector, retail and construction are the main reasons for the economic contraction From a sectoral perspective, value-added fell in the financial sector (-2.6% quarter-on-quarter growth), water utilities (-2.2%), energy supply sector (-1.9%), construction (-1.1%) and trade, transport & hospitality (-0.8%). The latter includes retail, of which sales volumes declined by more than 1% in line with low consumer sentiment. Taking into account the size of sectors as well, it was the financial sector, retail and construction that provided the largest drag on total value-added. Semi-public services (-0.2%) and manufacturing (0.0%) stagnated, while value-added still expanded in mining & quarrying (i.e. oil & gas, 3.9%), agriculture & fishery (1.9%), ICT (1.1%), business services (1.1%) and real estate (0.9%). The stagnation of manufacturing stands out positively, as this is despite the fact it has reduced the use of gas strongly (-39% in 3Q22 compared to 3Q19) and some firms were shut down partially or completely, such as those in aluminium, zinc and fertilisers. Manufacturers of pharmaceuticals, cars and trailers, clothing and electrical equipment performed particularly well in terms of production growth in the third quarter. Momentum worsens, but indicators and fiscal plans suggest only a mild recession The third-quarter figure for GDP is the start of a mild technical recession that we projected for the Dutch economy. We see sentiment indicators based on surveys declining further, in line with a weakening global business cycle. Today’s quarterly business sentiment indicator as released by Statistics Netherlands also points in the direction of further worsening of momentum in the market sector, as it dropped across all main sectors. The overall economy-wide indicator fell into negative territory for the first time since 1Q21. Investment expectations for the current year and next year fell but remained net positive. Business expectations for foreign turnover over the next three months also came down but remained positive on balance. So, there is less optimism, but not total gloom about the economy. Still, the situation is one of high capacity utilisation. Staff shortages are still the key factor limiting production and sales for the majority of businesses (34%). The share of firms reporting it as the main issue is, however, falling. Although the share of businesses seeing a lack of demand as their main issue has started to rise along with the share of firms claiming financial constraints (at 5%) as the main issue, it is still quite low at 11%. This is a confirmation that the economy is at a turning point of worsening momentum from a high level, and there is no reason for us to project a long and deep recession. What’s also important going forward is the fact that the Dutch government has announced huge support for households in the form of an energy price cap in 2023 and a €190 tax cut on the energy bill of households and some small firms for November and December 2022. It is also providing financial support to energy-intensive small and medium-sized enterprises (although less so than for households) of up to €160,000 per firm. Dutch budget for 2023: a big bazooka firing at high energy inflation Read this article on THINK TagsSentiment Investment GDP Exports Consumption Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Germany's consumer price index fell by 0.5% in November, slowing the year-on-year gain to 10.0%, according to the published Destatis preliminary estimate. The fall exceeded the expected 0.2% m/m decline and maintained the year-over-year rate at 10.4%. We previously pointed out that the October data was the peak of inflation in the eurozone. Fresh data from Germany strengthens this hypothesis. However, this reversal will draw more attention to the ECB's stance. Is this data a reason to lower the rate hike step? Recent comments from ECB members suggest that this is unlikely. Read next: Steen Jakobsen: ECB strategy is praying, hoping and waiting... not exactly action which gives hope for real economy| FXMAG.COM Central banks in the G7 are working to contain the unwinding of inflation. By starting too late, they have faced a rise in core inflation, excluding volatile and problematic food and energy, rising 21% and 38.4% y/y, respectively. In such circumstances, monetary policy at the central bank must remain restrained for an extended period. That means raising rates above neutral (around 2% in the eurozone) for an extended period. History has ample examples where policy easing too early led to repeated inflation shocks, which further strengthened consumer confidence in perpetually high inflation and changed consumer behaviour accordingly.

The unemployment rate dropped from 6.6% to 6.5% in October, showing that the labour market remains resilient despite the slowing economy. This will keep the European Central Bank on high alert in its fight against inflation Unemployment in the eurozone is at a record low Another upside surprise from the labour market. Despite an economy moving into recession, unemployment continues to trend down to new records. While German unemployment seems to have bottomed, southern Europe is still experiencing declining unemployment. Spain, Greece and Italy all saw the rate drop in October. The current rate of 6.5% is a new historic low since the series began in 1998 and is consistent with rising nominal wages. From here on, the labour market is set for a slowdown given our expectations of a winter recession. Surveys indeed suggest that the pace of hiring is slowing at the moment, which is set to come with a modest runup in unemployment. Given labour shortages, however, we don’t expect unemployment to increase much. Read next: Poland: Purchasing Managers' Index reached 43.4. The coming months will see a marked slowdown in industrial production growth says ING| FXMAG.COM When we hear ECB president Christine Lagarde say that a mild recession will not be enough to sustainably bring inflation down, this is likely a large part of the mechanism she is referring to. The question is whether that is the case when many supply-side factors are turning disinflationary – but that’s another matter. Expect the ECB to remain on high alert in its fight against inflation, although we do believe that it will opt for a slower pace of rate hikes in the coming months: we're expecting a 50 basis point rise for December. Read this article on THINK TagsGDP Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Risk appetite got a bit of a boost overnight despite disappointing Chinese NBS PMI figures. Health authorities in the world's second largest economy promised to revise the way in which zero-covid policies would be enacted, and touted progress in vaccinations for the elderly. The latter is seen as a key point in finally getting China in a position where restrictions can be lifted. Chinese factory orders hit the lowest level in seven months. But that was for the larger, government-run companies that are surveyed by the National Bureau of Statistics. The private measure of smaller, more export-oriented business is carried out by Caixin, which could moderate the current outlook What could move the markets Meanwhile, focus is on the rest of the world as PMIs are expected to repeat the upbeat tone seen during the preliminary results published two weeks. Here are some of the major factors to watch out for: China: China Caixin Manufacturing PMI is forecast to come in at 48.9, down from 49.2 previously. But given the result out of the official survey, the market is likely to be not surprised if the measure is closer to 48. On the other hand, a smaller drop than expected could add to the current positive momentum and buoy commodity currencies. Europe: German flash PMI was the standout, coming in well above expectations and breaking a multi-month slide. It stayed well into contraction, but could be shining a light at the end of the tunnel. Particularly when taken in combination with the surprise drop in inflation in the largest economy in Europe. Although it doesn't appear to be enough to shake the perception that the ECB will act quite aggressively at their final meeting for the year. Eurozone PMI is expected to repeat the flash reading of 47.3, which was a substantial improvement over the 46.4 of October. But, it's still below the 50 level, which separates contraction from expansion. Europe continues to contract, but not as much as expected. This also can be seen in the context of Eurozone inflation also coming in below expectations, just like with Germany. But, it should be pointed out that core CPI stayed steady, suggesting the improvement in inflation reading is due more to easing energy prices than a structural change in the shared economy. United States The final reading for S&P Manufacturing PMI is expected to be the same as the flash reading at 47.6, which was significantly down compared to 50.4 in the prior month, and well below the technical contraction of 49.9 expected. But this could be due to methodological differences. This is because the ISM Manufacturing PMI for November came in broadly speaking within expectations, at 50.2 compared to 50.0 expected. A couple of decimal points isn't a major difference this close to the line between contraction and expansion. But, it's expected that ISM will revise their measure down to 49.8, meaning both PMI measures will move into contraction, if expectations are met.

Some good news for once, with the eurozone PMI ticking up in December. Inflation pressures continue to fade due to lower demand and moderating supply chain problems. For the ECB, the latter adds to doubts about yesterday’s hawkish tone The composite PMI improved from 47.8 to 48.8 in December. This still signals contraction, but as the quarter comes to a close, we can conclude that the contraction in the eurozone economy was likely mild. The easing of contraction was noted in both the manufacturing and services survey. For manufacturing, output fell less in part because the drop in new orders also eased a bit. Very importantly though, delivery times improved for the first time since the start of the Covid-19 pandemic. This indicates that supply chain problems are quickly fading at the moment due to a combination of low demand for inputs and improvements in production. For services, new business continued to contract at a similar pace to last month but recreation saw an uptick in activity again. For price growth, the easing of supply problems is adding to disinflationary pressures. Businesses reported a significant improvement in input cost inflation as they rose at the slowest pace since May 2021. Selling prices still increased at a fast pace, but the pace has been slowing. This is related to the declining need to price through higher costs to consumers and because of discount sales related to lower demand, according to the survey. For the ECB, this must be quite a difficult survey to interpret. Yesterday, the central bank revealed a particularly hawkish take on the economic situation and ECB President Christine Lagarde noted that a mild recession is unlikely to be enough to tame inflation. While the downturn seems to be easing according to the survey, we also see that inflationary pressures continue to cool. For the doves on the governing council, the latter will likely fuel concern that the ECB could end up doing too much. Read this article on THINK TagsInflation GDP Eurozone ECB Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Inflation fell back to 9.2% in December, but rising core inflation means that not much will sway the European Central Bank from the hawkish path it set out late last year Inflation fell in December on the back of slowing energy price rises   A combination of price caps and lower oil and natural gas prices have caused a significant dip in energy inflation (from 34.9% to 25.7%), which was the main driver of the decline in headline inflation. The decline was broad-based by country, with all the major eurozone economies showing significant drops in price growth. It is likely that the peak in inflation is behind us now, but far more relevant for the economy and policymakers is whether inflation will structurally trend back to 2% from here on. Core inflation continues to show little sign of relief for now. It increased from 5% to 5.2% and saw sizable increases for both goods and services. The next two months will be critical as many businesses traditionally change prices at the start of the year. It could therefore be that core inflation rises further from now. While consumption remains under pressure and retail sales have been trending down for quite some time now, businesses continue to adjust their prices to the supply-side shocks of 2021 and 2022. So while supply-side shocks are fading – not just energy, but also think of container prices and various production inputs – core inflation is still adjusting with a lag. The ECB has taken a very hawkish stance towards this development and has indicated that it will hike through a mild recession to bring inflation structurally down to 2%. With energy inflation dropping quickly and energy supply forecasts improving, 2% could be reached much sooner than expected. Still, rising core inflation will be enough for the ECB to continue to hike by 50bp in February and March. Read this article on THINK TagsInflation Eurozone ECB Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

In the US, we see a further moderation in the annual rate of inflation, from 7.1% to 6.6%, and expect much sharper falls from early second quarter onwards. For the UK, we expect a negative monthly GDP figure for November, and for now are pencilling in a 0.1% fall in fourth quarter GDP. In the eurozone, we see a further improvement in the trade balance In this article US: Core inflation pressure elevated for now UK: Monthly GDP to point towards second consecutive quarter of negative growth Eurozone: Further improvements in trade balance expected   Shutterstock   US: Core inflation pressure elevated for now It is clear that economic headwinds are intensifying and business surveys are softening as a result. With business leaders becoming more pessimistic, we expect this to translate into weaker hiring and eventual job shedding as companies look to cut costs. Competitive pressures amid a weakening demand environment also suggest that inflation should slow too. However, Federal Reserve officials continue to indicate they think they have more work to do in the battle to get inflation back to the Bank's 2% target. They remain concerned that policy needs to be more restrictive and to stay restrictive for a long period of time to ensure that demand moves into balance with the economy’s supply capacity and price pressures subside. In that regard, the key data point next week is the US CPI report. We expect to see a further moderation in the annual rate of inflation from 7.1% down to 6.6%, but this is still more than three times faster than the Federal Reserve’s 2% target. Fed officials have made it clear they expect goods price inflation to continue softening  -  expect another big drop in used car prices given the steep decline in new vehicle sales as consumers pull away from major purchases and lending criteria becomes stricter. But officials are seemingly focused on services ex housing. The consumer spending story looks OK right now and that is likely to keep core inflation pressures somewhat elevated while. It is too soon for the weakening in the housing market to show up in a clear moderation in the cost of shelter since it typically lags by 12-14 months so that is more of a story for the second quarter into the third. Meanwhile, medical care costs, having fallen for two consecutive months, are unlikely to be quite so helpful in depressing overall inflation. Still, a 0.3% month-on-month print would lead to the annual rate of core inflation hitting 5.7% versus 6% in November. We expect to see much sharper falls in the annual rate of inflation from the early second quarter onwards. Other things to look out for include consumer confidence and small business confidence. Both are likely to remain weak given the impact of falling asset prices, high inflation and more headlines regarding job losses from some big corporate names. Also, look out for comments from officials, including Fed Chair Jerome Powell. UK: Monthly GDP to point towards second consecutive quarter of negative growth The UK’s monthly GDP figures have been a bit all over the place recently, in part because of the Queen’s funeral last September. But strip out the volatility and the economy is clearly weakening, and the constant downtrend in retail sales through last year is one such example. We expect a negative monthly figure for November, after October’s artificial bounce back following September’s extra bank holiday. That, and another such decline in December, would probably be just enough to lock in the second consecutive quarter of negative growth and mark the start of a UK recession that’s likely to last until at least the summer. For now, we’re pencilling in a 0.1% fall for overall fourth quarter GDP when the figures are released next month, and just over a 1.5% peak-to-trough fall in output over several months. Eurozone: Further improvements in trade balance expected The eurozone kicks off the year with new labour market data. October saw unemployment drop once more despite deteriorating economic conditions. The question is how long the labour market can continue its run of improving unemployment rates. If indeed we see unemployment decreasing further, this could unleash more hawkishness from the European Central Bank. Besides unemployment, we also get trade and industry data. Industrial production has been resilient despite the energy shock, but survey data points to weaker activity regardless. The trade balance is important to watch as expensive energy imports have completely flipped the eurozone trade balance from surplus to deficit. October saw an encouraging improvement in the trade balance and the question is whether softening natural gas prices have caused further improvements. This is important for the fair value of the euro/dollar. Key events in developed markets next week Refinitiv, ING TagsUS Eurozone   Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Industrial activity in November provided more evidence that the economy did not fall off a cliff in the fourth quarter but was not strong enough to avoid a contraction either   German industrial production increased by 0.2% month-on-month in November, from a downwardly revised -0.4% MoM in October. On the year, industrial production was down by 0.4%. Production in the energy-intensive sectors increased by 0.2% MoM and is now down by almost 13% compared with November last year. While production in the energy sector increased by 3% MoM, activity in the construction sector weakened by 2.2% MoM. Glass half full or half empty? Today's industrial production data brings back the old question of whether the glass is half full or half empty. To some, the current stagnation means that German industry is holding up better than feared. To others, it is only filled order books at the start of the war in Ukraine and the backlog of orders that prevented more severe damage to industrial production. In any case, industrial production is still some 4% below its pre-pandemic level. Almost three years after the start of the pandemic. The former growth engine of the German economy is stuttering and improvement is not really in sight. Despite the recent return of optimism as illustrated by improving sentiment indicators, the sharp drop in new orders, the inventory build-up in recent months, the lagged impact of high energy prices and potential supply chain frictions as a result of China’s Covid policies all bode ill for the short-term outlook. Still, the New Year started on a more optimistic footing for the German economy. The mild temperatures almost seem to have ended the energy supply crisis, at least for now. National gas reserves have increased again, and consumption is clearly below historical averages. However, the question is how sustainable the safety net of warmer temperatures and fiscal stimulus can be. Even at the risk of being perceived as the boy who cried wolf, the short period in early December when a real winter spell pushed gas consumption more than 10% above historical averages illustrates how deceptive the optimism at the start of the year could be. Let’s not forget that the German economy is still facing a series of challenges which are likely to weigh on growth this year: energy supply in the winter of 2023/24, changing global trade with more geopolitical risks and changes to supply chains, high investment needs for digitalisation and infrastructure and an increasing lack of skilled workers. While the warm weather should actually ring alarm bells in terms of climate change, it is a welcome surprise for the economy. However, the warm weather does not simply blow away all economic problems. Solid construction sector too little to avoid recession Today’s industrial production data was the last hard macro data before the German statistical office releases its first estimate of fourth-quarter growth. Remember that in the third quarter, soft data plunged like a stone although actual GDP growth surprised to the upside. This time around, it looks as if hard data will be catching up. So far, and compared with the third quarter, retail sales, exports and industrial production all point to a mild contraction in the economy. Only the construction sector seems to be in growth territory. Despite the latest improvements in confidence indicators, available hard data still suggests that the economy’s slide into recession has continued. Read this article on THINK TagsIndustrial propduction Germany GDP Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The German economy grew by 1.9% in 2022. This implies a stagnating, not contracting, economy in the fourth quarter. Will the widely-predicted recession simply fail to materialise? We remain doubtful. Avoiding the worst does not suggest the economy is doing well. The economy has just returned to its pre-pandemic level   Same procedure as every year. The German statistical office just released a first estimate for GDP growth in 2022, without having any single hard data point for the month of December. According to this first estimate, the German economy grew by 1.9% year-on-year, from 2.6% in 2021. Definitely not bad for a year with lockdowns and a war. However, to put things in perspective: the German economy has only just returned to its size of late 2019. Three years of crisis have not passed by unnoticed. First estimate points to stagnation not contraction in fourth quarter The most important element of this annual growth rate is what it means for fourth quarter growth. According to the statistical office, the German economy stagnated in the fourth quarter, after growing by 0.4% quarter-on-quarter in the third quarter. In the past, these implied estimates for the final quarter were very accurate. However, at the current juncture, the economic performance in December could have been more volatile and disruptive than in the past; think of the weather impact, longer Christmas breaks and stronger-than-expected impact from the energy crisis on consumption and production. We think that this estimate for the fourth quarter will still be revised somewhat. In any case, today’s data shows that for the entire year 2022, the catch-up effect after the end of lockdowns, both for consumption and production, outweighed the economic fallout from the war in Ukraine. In the final months of the year, fiscal support also cushioned the downswing. Avoiding the worst doesn't mean that growth will rebound strongly Looking ahead, the post-lockdown catch-up is over and will not support economic activity in 2023. The adverse effects from the war and the energy crisis are likely to prevail and will be a drag on the economy. Weakening new industrial orders since February last year and weak consumer confidence are just two of many reasons for more trouble ahead for the German economy. Still, the New Year started on a more optimistic footing for the German economy. The mild temperatures almost seem to have ended the energy supply crisis, at least for now. National gas reserves have increased again, and consumption is clearly below historical averages. While the warm weather should actually ring alarm bells in terms of climate change, it is a welcome surprise for the economy. That said, the weather is far from predictable and the economic safety net is built on fiscal stimulus. More generally, let’s not forget that the German economy is still facing a series of challenges which are likely to weigh on growth this year and beyond: energy supply in the winter of 2023/24, changing global trade with more geopolitical risks and changes to supply chains, high investment needs for digitalisation and infrastructure and an increasing lack of skilled workers. Today's data suggests that the widely-predicted recession might not happen. We remain very cautious. The sheer fact that the German economy avoided the worst, unfortunately, does not mean that all of the economic problems have disappeared. Read this article on THINK TagsGermany GDP Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

US markets started the week very much on the front foot yesterday, with the S&P500 closing above the 4,000 level and the Nasdaq 100 leading the way higher with its second successive 2% daily gain.   The outperformance in tech appears to point to a growing conviction on the part of investors that the Fed will soon have to look at cutting rates before the end of the year, although to look at bond markets yesterday, yields also moved higher, as money flowed out of treasury markets.   With a lot of tech companies starting to announce job cuts, as well as other measures to rein in costs, and inflationary pressures showing further signs of easing, it would appear that US investors are starting to think in terms of the next move higher, despite concerns over lower profits   Given the uncertain economic backdrop this comes across as a bit of a leap of faith, and its also notable that while US markets have started to gain momentum in the past few days, European markets have started to lose some of their early year momentum.   While US markets surged higher yesterday it is notable that today's European market open is likely to be a much more tepid affair, suggesting perhaps that investors in Europe don't share the same enthusiasm about the economic outlook, despite the reopening of the Chinese economy, which may help to provide a demand boost.   This increase in optimism is likely to be reflected in today's flash PMI numbers for January, which have already seen a pickup in economic activity in the past few months due to the sharp declines in energy prices from the peaks in August and September.   In Germany manufacturing PMI fell to 45.1 in October, but has recovered since then, albeit is still very much in contraction territory. Services have seen a similar pattern, dropping to two-year lows of 45, before showing small signs of a recovery. We expect to see a further improvement in today's January numbers to 48 for manufacturing and 49.5 in services.     In France, we've seen a similar pattern in manufacturing, although services have been more resilient due to the energy price subsidies provided by the French government to cushion French households from the worst effects of higher prices. France manufacturing is expected to improve to 49.5 from 49.2, and services to 49.8 from 49.5.   In the UK, manufacturing has struggled over the past 3 months and looks set to continue to do so, while services have been slightly more resilient. As we head into 2023 the challenges for business will be whether we see new investment, and a pick-up in economic activity, after the rising pessimism seen at the end of last year. Manufacturing is expected to remain subdued at 45.5, while services could slip back from 49.9 to 49.5.   Public sector borrowing in December is expected to remain high on the back of rising debt interest and energy price support with expectations of a small fall from November's £22bn to £18bn.   US manufacturing and services are expected to remain weak at 46 and 45 respectively.      EUR/USD – a marginal new high at 1.0927 yesterday, before slipping back again. The main resistance remains at the 1.0950 area which is 50% retracement of the move from the 2021 highs to last year's lows at 0.9536. A move through 1.0950 opens up a move towards 1.1110. Support remains back at the 1.0780 area.   GBP/USD – ran out of steam just below the 1.2450 area yesterday slipping back towards the 1.2320 area. Has managed to hold above the 1.2300 area for the last three days. Above 1.2450 could see a move towards 1.2600. A move below 1.2290 could see a move towards 1.2170.   EUR/GBP – slid back from the 0.8815 area but while above the 50- and 100-day SMA which acted as support last week the bias remains for a return to the recent highs at 0.8890. The next support below 0.8720 targets 0.8680.   USD/JPY – has squeezed back above the 130.20 area, with a move through 131.60 and last week's high potentially targeting a return to the 132.50 area in the short to medium term. Support currently at the 128.20 area as well as the lows last week at 127.20.     FTSE100 is expected to open 20 points higher at 7,804   DAX is expected to open 47 points higher at 15,150   CAC40 is expected to open 23 points higher at 7,055   Email: marketcomment@cmcmarkets.com Follow CMC Markets on Twitter: @cmcmarkets Follow Michael Hewson (Chief Market Analyst) on Twitter: @mhewson_CMC

Spain's unemployment rate increased slightly to 12.87% in the fourth quarter of 2022, from 12.67% three months earlier. Although we should not expect a major reversal, the labour market will weaken further this year Spain's labour market is holding up well Spain's unemployment rate was 12.87% in the fourth quarter of 2022, still well below the long-term average. Despite the small increase, it is still a remarkably strong figure at a time when we are facing an energy crisis and record-high inflation, which are creating business uncertainty. The strong numbers are largely due to a strong first half of the year. In early 2022, Covid-19 restrictions were lifted, causing economic growth to pick up very strongly. Despite the outbreak of war in Ukraine, the economy continued to do very well until the summer because we were still in the middle of that recovery. Many additional jobs were then created, especially in the service sector. There are also several structural factors that increase the demand for labour. The most important of course is the ageing population, which makes the labour market structurally tighter. A growing weight of the more labour-intensive service sector in the economy also structurally increases the demand for labour. Consequently, previous economic models, such as Okun's law which provides an empirical link between a country's economic growth and the unemployment rate, are no longer sufficient to understand labour market dynamics. Labour market will further weaken this year The war in Ukraine, the energy crisis, and sharp price increases have had a major impact on Spanish companies. However, we should not forget that the labour market always reacts to economic cycles with some delay. Therefore, we will not see the effect of the energy crisis on unemployment figures until this year. On the other hand, a major turnaround seems unlikely in the short term. Given the difficult economic conditions, hiring dynamics and company vacancies are still decent. We will need to see a further weakening of companies' hiring intentions before unemployment begins to rise. Several structural factors will continue to ensure that labour demand remains high in the coming years. We expect unemployment to start rising again during 2023 and reach 13.1% by the end of 2023. Read this article on THINK TagsUnemployment rate Spain Labour market Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Only a small increase in unemployment in January shows that the labour market remains an important source of resilience in the economy Almost four million people in Germany work in the metal and electronics industry   German unemployment increased by 162,100 in January, increasing the number of unemployed to 2.616 million. The seasonally-adjusted unemployment rate, however, dropped to 5.3%, from 5.5% in December. Don’t be fooled by the increase in unemployment. This was still the second-best January performance of the German labour market since reunification, with a small caveat that the number of people working in furlough schemes has increased significantly over the last few months. Source of resilience The strong labour market was an important driver of the economy’s resilience last year. A combination of fiscal stimulus, furlough schemes and demographic change seems to have made the German labour market almost invincible. It, therefore, doesn’t come as a surprise that wage pressure has picked up. We expect wage growth of around 5% this year and 3% in 2024. Not included in these numbers are one-off payments that have become more popular in wage bargaining since the government announced it would exempt one-off payments of up to 3000 euros from taxes and social contributions to help alleviate the impact of rising inflation. Earlier this morning, however, the sharp drop in retail sales (-5.3% month-on-month in December) showed that even the solid labour market cannot prevent high inflation and uncertainty from denting private consumption. Read next: Samsung Demand For Semiconductors And Smartphones Remains Weak| FXMAG.COM Looking ahead, the lack of skilled workers remains a huge burden for the German economy. This has been driven not only by the end of lockdowns but also by structural trends like demographic change and it is a problem that is more likely to worsen than improve over the coming years. As a result, Germany will either witness additional wage pressure or a shrinking of the supply side as companies have to scale down production. The labour market has been an important driver of the economy's resilience over the last few years. In the coming years, the labour market will be another symbol of the structural transition that the entire economy will have to undergo. Read this article on THINK TagsLabour market Germany Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The European Central Bank has hiked interest rates by 50bp and made a quasi-announcement of a further 50bp hike in March, opening the door to either a pause or a slower pace in its hiking cycle   And they did it again. The ECB hiked interest rates by 50bp, bringing the deposit rate to 2.5% and the refinancing rate to 3%. But there was more, the ECB quasi pre-announced another rate hike next month by 50bp as well, opening the door to either a pause or a slower rate hike pace beyond March. The ECB also confirmed the December decision that the Asset Purchase Programme (APP) portfolio will decline by €15bn per month on average from the beginning of March until the end of June 2023. Not done, yet It took the ECB a while, but it seems to have got the hang of it: hiking interest rates. And as long as core inflation remains stubbornly high and core inflation forecasts remain above 2%, the ECB will continue hiking rates. The increasing probability that a recession will be avoided in the first half of the year also gives companies more pricing power, showing that selling price expectations remain elevated. The celebrated fiscal stimulus, which has eased recession fears, is an additional concern for the ECB as it could transform a supply-side inflation issue into demand-side inflation. These are two factors that could extend inflationary pressures in the eurozone, albeit at a lower level than we see at the moment. As a consequence, we expect the ECB not only to continue hiking into late spring but also to keep interest rates high for longer than markets have currently pencilled in. Whether the ECB agrees with this view or not might become clearer at the press conference, starting at 2.45pm CET. Read this article on THINK TagsMonetary policy Inflation Eurozone ECB Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

French industrial production continued to grow in December but still hasn't returned to its pre-pandemic level. While the shock of 2022 has yet to be fully digested by French companies, the outlook for 2023 remains moderate The French labour minister, Olivier Dussopt. being shown round a factory in southern France last month Increase in industrial production French industrial production increased by 1.1% over one month in December 2022, after +2% in November, thanks largely to a rebound in electricity production. Manufacturing output rose by 0.3% Month-on-Month in December, after +2.4% in November. The rebound was driven primarily by transport equipment manufacturing, which continues to recover after months of supply chain disruption. However, transport equipment production is still 14% below its pre-pandemic level. In December, coking and refining also grew rapidly, continuing its recovery from the October strikes which saw output fall by 47% over a month. The manufacture of capital goods fell by 3.3% in December, and the production of foodstuffs fell by 1.7%. Over the year, French manufacturing production increased by 3.6%. This is faster than GDP (+2.6% in 2022). Nevertheless, we still haven't fully recovered from the disruption of 2020 and 2021. At the end of 2022, French manufacturing output was still slightly below its pre-pandemic level, while GDP was 1.2% higher. It is also worth noting that, according to detailed GDP data published this week by INSEE, the value added of the manufacturing sector fell by 0.5% in the fourth quarter of 2022, despite the increase in production over the same period.  Read next: Starbucks Revenues Are High Despite High Costs| FXMAG.COM 2023 expected to be a minor year What can we expect in 2023? Thanks to supply chains easing, the production of transport equipment should continue to catch up and that should boost the whole of French manufacturing production. On top of that, since the beginning of the year, optimism seems to have returned thanks to the fall in energy prices on the international markets and the reopening of China, leading to upward revisions of the growth outlook. But beware of over-optimism. The shock of 2022 has yet to be fully digested by French companies. In a recent study that takes into account the types of contracts existing in France, INSEE estimates that most of the increase in electricity bills for companies has yet to take place. While bills rose by an average of 30% in 2022 for companies in the agricultural and industrial sectors, a rise of 92% is expected in 2023. As the INSEE study is based on data collected in November before the plunge in international energy prices, the rise in bills for 2023 may be overestimated. Nevertheless, there is little doubt that business energy bills will rise more in 2023 than in 2022 in France, despite the fall in spot prices on the markets. This is likely to hamper industrial production. In addition, the global economic slowdown, particularly in Europe and the United States, and the rise in interest rates, which increases the cost of financing for companies, are also likely to weigh on the industrial outlook in 2023. So, the contribution of industry to growth is likely to be subdued at best.  We expect GDP to grow by 0.4% in 2023, after +2.6% in 2022. Read this article on THINK TagsIndustrial production GDP France Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

We should guard against the premature return of optimism even if things seem better than expected. Watch: New year optimism may be short-lived The first month of the new year brought a couple of positive surprises to the global economy. The less complicated-than-expected reopening of the Chinese economy, lower energy prices and a bout of optimism from soft indicators out of Europe didn't only fuel a stock market rally but also led to a wider upward revision of many growth forecasts. However, as much as in times of darkness, even a sunrise is mistaken for a sunset, first signs of optimism do not always point to an upcoming growth party. We have said it before, but better is not necessarily good enough. Up to now, the sheer fact that the European economy has been holding up better than feared and could even have avoided a winter recession brings welcome relief. The same holds for the US economy, where it takes longer than initially expected before higher interest rates finally take their toll. Together with the reopening of China, the global economy is definitely in a better place than feared only a couple of months ago. However, we don’t think that this is yet the right time to become overly optimistic. In fact, the list of potential risks - but also very real drags - on many economies is still long. In this regard, particularly the idea that the latest improvements in soft European indicators could signal an upcoming rebound of the economy looks premature. Given that the European economy has now been lagging behind that of the US on so many aspects, be it inflation, monetary policy or growth, it is hard to see why the European economy would rebound when the US is staging a soft or hard landing. The latest soft indicators in Europe could have been like those rays of sunshine in January: temporary relief but too early to foretell spring weather. Read next: Japanese Startup Aerwins Technologies Will Be On NASDAQ| FXMAG.COM The example of the US illustrates that textbook economics still works: excess demand fueled higher inflation, triggered a strong monetary policy reaction, and higher interest rates are now pushing the economy into recession. The first cracks in the labour market have become visible, and the housing market has started to come down. As inflation will retreat sharply, we still expect the Fed to cut rates in the second half of the year, even if a milder recession and somewhat higher core inflation could lead to second-guessing at the Fed. The example of the US economy is also a good reminder for Europe. Here, headline inflation has also started to come down, but core inflation remains stubbornly high, partly driven by the ongoing pass-through of last year’s higher energy prices but also partly driven by fiscal stimulus. The risk here is that what initially was a supply-driven inflation shock could become demand-driven inflation as a result of fiscal stimulus. In any case, the US example should tell the eurozone that higher interest rates do matter and can bring down economic activity: traditional economic wisdom. However, for a long while, the dampening impact of higher ECB interest rates on the eurozone economy seems to have been ignored by many experts and policymakers. Finally, remember that decoupling between the US and the eurozone economy has never really existed. With a slowing economy, it looks almost impossible to see an outperforming eurozone economy when at the same time, the full impact of ECB rate hikes still needs to materialise, the region is still facing an energy crisis, and the war in Ukraine mercilessly continues to drag on.  The outlook for the global economy has improved, but better is still not good enough. The list of risks is long and the probably most underrated risk is central banks’ action to defeat inflation. Nothing’s wrong with that, but please remember that at least in the US, eight out of the last nine times the Fed embarked on a series of interest rate hikes to rein in inflation, a recession followed. TagsMonthly Economic Update Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

A small increase in retail sales in January suggests a weak start to the year for the consumer amid stubbornly high prices. While surveys about the first quarter have been relatively upbeat so far, these sales data don’t give much evidence that a rebound has started. We expect GDP growth in the first quarter to be flat The Mall of Berlin, one of the city's largest shopping centres   After the sharp decline in retail sales in December, a bounce back was expected in January, but the 0.3% month-on-month increase still leaves retail trade volumes well below the November figure. This is a weak start to the first quarter and makes growth over the quarter a challenge. Retail sales have been on a declining trend since November 2021, but taking the latest data into account, we can see that there has been a more rapid decline since the autumn of last year. For the consumer, the positive thing is that the inflation peak is behind us, wages are improving, and the economy has not dipped into a material recession, which supports the outlook for employment. This has helped confidence to improve a little, but with purchasing power still being squeezed, it does not seem like there is a lot of momentum for a quick bounce back in 2023. Read next: Demand For Automotive Chips Will Continue To Grow As The Outlook For The Electric Vehicle Market Looks Solid| FXMAG.COM Overall, surveys are suggesting somewhat better economic activity in the first quarter, but given fourth-quarter weakness and surveys missing the mark recently, performance at the start of the year is clouded in uncertainty. This makes it hard to get a strong view of where the economy is headed in the short term, but if today’s release on retail sales is anything to go by, it doesn’t look like the economy has started a rebound just yet. Read this article on THINK TagsGDP Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

GDP growth in the eurozone was revised down from 0.1% to 0% in the fourth quarter. Poor household consumption and investment data show that underlying developments are weaker than expected, adding concern about eurozone economic performance   Sentiment about the eurozone economy has been more upbeat of late as many bad economic scenarios have been avoided. However, as more data comes in it is clear that the eurozone economy is struggling, with GDP growth revised down to 0.0% in the fourth quarter. This in itself is concerning, but when we look deeper into the GDP release a bleaker picture is revealed. As expected, growth was revised down thanks to weaker than initially released German and Irish data, but even stagnation seems to overstate the real performance of the eurozone economy in the fourth quarter. Household consumption contracts Household consumption in the fourth quarter of 2022 saw the largest decline since the start of the eurozone in 1999, with the exception of during the Covid-19 pandemic. The decline was not the same across countries; the Netherlands and Belgium, for example, saw healthy growth, but France, Germany and Italy all saw declines of around -1%, while Spain experienced a drop of -2.4%.  Household consumption saw the largest decline, with the exception of the Covid-19 pandemic Source: Eurostat, ING Research   When looking at a breakdown of consumer categories to see what caused this drop, we see that a large decline in non-durable goods consumption led the way. This is likely due to a large adjustment in energy consumption, which is a positive development. The declines in services and semi-durable goods consumption are more worrying though. Durable goods consumption did continue to grow, likely mainly due to older orders being fulfilled now that supply chain problems and input shortages have faded. Most consumption categories showed declines in 4Q Source: Eurostat, ING Research calculations Weak investment reflects economic concerns and higher rates Investment dropped sharply as well in the fourth quarter, by 3.5% quarter-on-quarter. It's important to note, however, that Irish intellectual property investments, related in large part to multinational accounting activity, had a big negative impact on this figure. Stripping this out, we still note a decline of -0.7%. This is the first decline since the third quarter of 2021. Read next: ECB preview: 50bp next week but how far will the ECB still go?| FXMAG.COM Germany, Spain and Belgium saw declines in investment, France and the Netherlands were roughly stable, and Italy and Greece saw increases – the latter in part due to EU recovery fund support. Overall, the lower investment appetite from firms is likely related to concerns about economic growth and uncertain prospects for the months ahead, while higher interest rates are also starting to bite. Investment has also dropped, but less markedly Source: Eurostat, ING Research calculations Government and weak imports pushed the GDP growth figure up to 0% With household consumption and investment down so sharply and together contributing -1.2 percentage points to the GDP growth figure, it’s important to look at offsetting factors. Government consumption is a key one, contributing 0.2 ppt positively, while inventories still added 0.1 ppt to the GDP figure. The main contribution came from net exports though as imports declined sharply in the fourth quarter while exports growth slowed markedly to 0.1%. In total, that resulted in a 0.9 ppt positive contribution from net exports. This means that the main positive contributor to GDP in the fourth quarter was the sharp decline in imports – this is hardly a sign of strength. Weaker imports contributed positively to GDP, masking very weak domestic demand Source: Eurostat, ING Research   For the ECB, the release of the underlying components of GDP actually provides a dovish signal. Stagnation in GDP at face value is not a sign that demand is cooling rapidly, but the underlying components show that economic conditions did deteriorate more markedly than initially expected. It’s hard to read where economic activity is headed in the short term, with both positive and negative news coming in about the first quarter of this year. On the back of that, we expect another quarter of stagnating GDP. Read this article on THINK TagsGDP Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Production rose 0.7% between December 2022 and January 2023 but maintains a broad trend of stagnation. Strong German and Irish production figures mask weakness elsewhere in Europe. The outlook remains very uncertain with weak orders but improving supply chain problems and lower energy prices The weakest industry in January was pharmaceuticals   Industrial production increased by 0.7% in January, which was slightly better than expected. German production increased by 1.8%, while Ireland saw an increase of 9.3% (Ireland has become notorious for large swings in recent times). The other large manufacturing countries – Italy, France, Spain and the Netherlands – posted losses. By sector, it was a mixed bag. Overall, the more energy-intensive industries saw an uptick in production, but nothing close to a big bounce back. Growth of around 2% for the chemical, paper and basic metals sectors does not nearly make up for the losses seen in recent months as the energy crisis hit. The top performers were heavy users of semiconductors like electrical equipment producers, which saw growth boosted by easing shortages. The weakest industry in January was pharmaceuticals, while growth in the auto sector production was also negative. These sectors had been strongholds in production growth in the fourth quarter of last year. Read next: FX Daily: A nervous calm returns to FX markets| FXMAG.COM The current environment for industry is an odd one. Backlogs of orders are being fulfilled now that supply chain problems have eased, and energy-intensive production is doing better due to recent lower market prices for energy. At the same time, the eerie reality is that new orders continue to suffer at the moment, which makes the production uptick likely to be short-lived or at least limited. A continuation of the current trend of broad stagnation is therefore a decent bet for the months ahead. Read this article on THINK TagsGDP Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Investor confidence and retail sales data released on Tuesday beat average market forecasts but showed no improvement over recent months. The Sentix investor confidence index rose from -11.1 to -8.7 in April. This is roughly where the index was in February. However, it has been in negative territory for 13 months and has shown no positive trend in the last three months. Eurostat reported that retail sales fell by 0.8% in February, after the same increase in the previous month. On a yearly basis, sales are down by 3%. The retail sales index has been downward since November 2021, breaking the long-term upward trend that began around ten years ago. Read next: European Central Bank meets in the beginning of May. Eurozone Sentix Investor Confidence rises to -8.7| FXMAG.COM Melting retail sales and investor pessimism cast doubt on whether the ECB still needs to raise interest rates. However, everything is relative in the currency market, and expectations are now much higher that the Fed will end its hikes sooner and be the first to start easing, supporting the euro's rise against the dollar.

The eurozone composite PMI increased from 53.7 to 54.4, marking an acceleration of growth at the start of the second quarter as price pressures fade further. A rebound in services masks weakening manufacturing performance Pictured: France's business district at La Defence   The PMI sheds a positive light on the economic performance in the eurozone, as a pickup in service sector activity is boosting growth. The increase in the services PMI from 55 to 56.6 was particularly strong and marks the highest reading in a year. The PMI also paints a picture of increasing divergence, though. The manufacturing output PMI dropped sharply from 50.4 to 48.5 as new orders remained weak and most activity is currently coming from reducing backlogs of work. This reading is in line with production contraction. Overall, it looks like the economy is rebounding from a feeble winter at the moment, but manufacturing weakness remains a concern and dampens the upturn. Read next: Eurozone consumer confidence continues to improve at low levels| FXMAG.COM Like last month, the survey indicates that price pressures are easing. In manufacturing, cost pressures are falling quickly on the back of improving supply chain problems and weakening new orders. Service sector inflationary pressures are also coming down, but at a slower pace due to rising wages. For the European Central Bank, this remains the largest concern in tackling inflation right now. Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The eurozone economy carries on along the rim of stagnation. A meagre 0.1% quarter-on-quarter GDP growth in the first quarter with high divergence across member states is better than feared –  but clearly no reason to cheer Source: iStock   The eurozone economy grew by a meagre 0.1 % quarter-on-quarter in the first quarter of the year, from zero in the fourth quarter of 2022. On the year, GDP growth came in at 1.3%. Growth across the eurozone ranged from -2.7% QoQ in Ireland to +1.6% QoQ in Portugal. A homogenous monetary union looks differently. Resilence and divergence More resilient than expected is clearly one label to put on the eurozone’s economic performance. In fact, the eurozone economy has now been able to avoid what a few months ago was probably the best predicted recession ever. The warmer winter weather, lower wholesale energy prices, the reopening of China and fiscal stimulus are the key drivers behind this better-than-expected performance. However, there is no reason for complacency. First of all, the growth performance is anything but homogenous. While the largest eurozone economy, Germany, remains in recessionary territory, France and Spain today slightly surprised to the upside. Growth in the eurozone ranged from -2.7% QoQ in Ireland to +1.6% QoQ in Portugal. A divergence, which doesn't make the ECB's task any easier. To some extent, this divergence could simply be the result of different time lags for fiscal stimulus and energy price caps. More structurally, however, this divergence could also be the start of a more structural rebalancing of the eurozone economy as Germany’s economic business model is clearly the most affected by higher energy prices, energy transition and global trade tensions. Read next: Taiwan’s GDP contracted more than expected in first quarter| FXMAG.COM Looking ahead, a short-lived industrial renaissance and the gradual impact of recent wage increases could actually lead to a further acceleration of eurozone growth – at least in the short run. In fact, it will again be a race between two opposing drivers: the positive momentum in industry and wage increases against the impact of monetary policy tightening and a looming US recession. In true European tradition, neither of the two will win. The compromise for the eurozone economy will be subdued growth going into 2024. Read this article on THINK TagsGDP Eurozone ECB Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The composite PMI fell from 54.1 to 53.3 in May, which is the first decline since October last year. The divergence between services and manufacturing is growing, with services inflation accelerating again. The latter is the main concern for the European Central Bank Source: Shutterstock   The PMI continues to point to decent economic growth, but the first decline in the index in more than half a year is indicative of the weakening manufacturing sector. The decline in the manufacturing output PMI from 48.5 to 46.3 puts it further into contraction territory. New orders continue to fall and backlogs of work are becoming smaller, adding to output concerns in the manufacturing sector. For services, demand continues to be rather strong. The services PMI still indicates strong output growth at 55.9, but the index did come down from 56.2 in April. New business continues to grow for the service sector and demand is buoyed by a faster increase in wages. As wages are also the most important input cost for services, this has caused price expectations to increase again. Read next: Rates Spark: June hike angst and supply pressure yields higher| FXMAG.COM May’s PMI release confirms that concerns about elevated core inflation should centre around services, while goods inflation is set to ease markedly from here on. The economy continues in a 'muddling through' phase, as the stagnation seen around the turn of the year has not given way to a strong recovery. The strong services performance and subsequent inflation pressures will likely keep the ECB on its toes heading into the summer as any impact on overall inflation unfolds. Read this article on THINK Tags GDP Eurozone Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

The construction sector’s sinking circular foundations Eurozone construction companies may have ambitions to improve circularity in their sector, but rising waste levels show things are not going to plan. While the circularity rate of building materials is higher than that of the EU economy overall, we're seeing signs of stagnation. Circular construction goals are starting to slip out of reach   Progress halted by construction waste In the path toward creating a circular economy, the process of reducing waste levels is absolutely crucial – and we're seeing this take place slowly but surely in the European Union's economy as a whole. The total amount of waste has decreased by almost 3% in the last decade and by approximately 8% in the manufacturing sector.   However, it seems the opposite has occurred in the construction sector, with the amount of waste growing by more than 6% from 2010-2020. Construction waste refers to the waste and debris generated from building, renovation and maintenance, demolition and construction site clearance. This includes materials such as concrete, wood, metals, bricks, insulation materials, glass and plastics. And we'll be trying to understand the reasons why in the report.   It's important to consider the role of the European Commission in all this. As the green transition route continues to evolve, the EC presented a number of measures dedicated to making sustainable products the norm. The European Green Deal package, introduced last year, is set to play a major role in moving progress along. A key part of the proposal is the revision of the Construction Products Regulation, which aims to make the design and manufacture of construction products more durable, recyclable and easier to re-use.   But as we try to move closer to developing a circular economy, the construction industry is still a huge waste producer; in 2020, it contributed 37% of total waste in the EU.   Tonnes of waste generation in construction sector increases Development total waste generation in EU-27 in absolute tonnes (not corrected for production volume development), Index 2010=100     What's going on? Construction waste increases as production volumes fallTransitioning towards a circular economy should signal a drop in the amount of waste in tonnes. An increase in production levels could provide one explanation for rising levels – yet, in relative terms, waste generation in the construction sector only appears to have worsened. The sector faced a drop in production levels by 7.6% in the years 2010-2020, while the manufacturing sector experienced a rise of 11.6% and all economic activity grew by 8.1% in the same period. As a result, the level of construction waste per unit output has increased even further.     Labour shortages and more renovation We see two possible reasons for the increased amount of waste in the construction sector. Due to the shortage of workers, construction companies may opt for new materials instead of reusing old ones, as the latter can be more labour-intensive. Additionally, the share of the renovation and maintenance market has increased in recent years. Both the demolition and removal of existing building materials mean that renovation projects often generate more waste than new construction.   Contributions to waste in the EU As we move closer to developing a circular economy, it is very important to pay attention to the construction sector as a huge producer of waste. In 2020, it contributed 37% of total waste in the EU.   Construction sectors produce more than a third of all EU waste Share of generation of total waste in tonnes in EU-27, 2020     High-grade and low-grade circular construction There are many different circular construction methods. The best option is to reuse high-grade building materials and parts – or even to repurpose the buildings themselves. In the construction sector, this is often seen in the transformation or renovation of existing buildings. Recycling should only be used as a last resort. For instance, a wooden frame has a much higher value than the wood it is made of – and the circular economy is heavily centred around retaining as much value as possible. The more buildings we're able to repurpose and building material parts that can be reused, the better.    

The main news of the weekend was the agreement on the US debt limit, which may serve as a basis for increased risk demand at the beginning of the week. The House of Representatives is expected to vote on Wednesday.   It was reported that the debt ceiling will be approved until the 2024 presidential elections. Non-defense spending will remain at current levels in 2024 and will increase by only 1% in 2025. This is a compromise between Republican demands for sharp spending cuts and Democratic intentions to raise taxes.   The aggregate short position in the US dollar decreased by 3.3 billion to -12.1 billion during the reporting week. Overall, sentiment towards the dollar remains negative, but the trend may have changed.     It is also worth noting a decrease in the long position on gold by 4 billion to -31.7 billion, which is also a factor in favor of the US dollar. The core PCE deflator increased by 0.4% MoM, which is slightly higher than the consensus forecast of 0.3%.   Despite the faster-than-expected price growth, real consumer spending rose by 0.5% MoM, surpassing the expected 0.3%. The rise in the PCE deflator indicates that the fight against inflation is still far from over. In a 3-month annualized expression, the core PCE deflator stands at 4.3%, the same as in April 2022. The combination of higher spending and faster price growth is expected to lead to the Federal Reserve raising rates in June. Cleveland Fed President Loretta Mester, commenting on the released data, stated that "the data that came out this morning suggests that we still have work to do."   The CME futures market estimates a 63% probability of a Fed rate hike in June, compared to 18% the previous week, making the strengthening of the dollar in the changed conditions more than likely. Monday is a banking holiday in the US, so by the end of the day, volatility will decrease, and we do not expect strong movements. EUR/USD The ECB maintains a firm stance on continuing rate hikes as part of its fight against inflation.   On June 1, preliminary inflation data for the Eurozone will be published, and the forecast suggests a slowdown in core inflation from 5.6% to 5.5%. If the data release aligns with expectations, it will lower the ECB rate forecasts and put additional pressure on the euro.   The net long position on the euro decreased by 2.013 billion to 23.389 billion during the reporting week, marking the first significant reduction in the past 10 weeks. The calculated price is moving further south, indicating a high probability of further euro weakening.     EUR/USD has predictably declined to 1.0730, where support held, but we expect another attempt to test its strength, which will likely be more successful. Within a short-term correction, the euro may rise to resistance at 1.0735 or 1.0830, but the upward movement is likely to be short-lived and followed by another downward wave. Our long-term target is seen in the support zone of 1.0480/0520.   GBP/USD The decline in inflation in the UK is once again being called into question. The core Consumer Price Index rose from 6.2% YoY to 6.8% in April, with yields sharply increasing. The retail sales report for April, published on Friday, showed that the slowdown in consumer demand remains more of an aim than a reality. Retail sales excluding fuel increased by 0.8% MoM, significantly higher than the forecast of 0.3%.   If it weren't for the sharp decline in energy demand, both the monthly and annual retail growth would have been noticeably higher than expected. Monday is a banking holiday in the UK, and there are no macroeconomic data expected this week that could influence Bank of England rate forecasts.   Therefore, the pound will be traded more in consideration of global rather than domestic factors. We do not expect high volatility or significant movements. The net long position on the pound slightly decreased by 84 million to 899 million during the reporting week. The bullish bias is small, and the positioning is more neutral than bullish. The calculated price is below the long-term average and is downward-oriented.     The pound has predictably moved towards the support zone at 1.2340/50, but the decline has slowed down at this level. We expect the decline to continue, with the nearest targets being the technical levels at 1.2240 and 1.2134. There is currently insufficient basis for a resumption of growth.  

Unacceptably high core price dynamics will lend a helping hand to ECB officials pushing for a hawkish line The most likely outcome to this week's inflation releases, still unacceptably high core price dynamics, will lend a helping hand to ECB officials pushing for a hawkish line.   Warnings that hikes may have to continue until September will stand a better chance of pushing longer term rates higher even if a subdued economic outlook, and growing doubts about the strength of China's post Covid recovery, should prevent European rates from rising as quickly as their US peers in the coming weeks. Wider USD-EUR rates differentials should only be a temporary development, however, and one resulting from a rise in global rates.   Market participants who, like us, expect lower rates into year-end, should also consider the possibility of US rates falling faster than their European peers, perhaps to sub-100bp levels for 10Y Treasury-Bund spreads.   This is all the more true since European markets have to contend with another dollop of political uncertainty in the form of early Spanish general elections on 23 July. The prime minister called for a vote after local elections defeat at the weekend and the opposition party PP is on the front foot, although it would likely rely on a coalition with another party due to the fragmented nature of the Spanish political landscape.   Spain’s still wide budget deficit (the European commission forecasts 4.1% of GDP this year and 3.3% next) mean a period of uncertainty is an unwelcome development and could lead to underperformance of Spanish government bonds vs peers such as Portugal and Italy.   Early elections mean Spanish bonds are at risk of underperformance vs Italy and Portugal   Today's events and market view Spain kicks off this week’s inflation releases. This will come on top of Eurozone monetary aggregate data and the European Commission’s confidence indicators for the month of May. One theme in European macro releases has been the softening of survey-based data, such as Germany’s Ifo (see above).   US releases feature house prices, the conference board’s consumer confidence, and the Dallas Fed manufacturing activity index.   Bond supply will take the form of Italian 5Y, 10Y fixed rate bonds, as well as 5Y floating rate bonds.    

ECB Preview: Don’t look back in anger A 25bp rate hike looks like a done deal for next week’s European Central Bank meeting. However, with growth disappointing, the economic outlook getting gloomier and inflation dropping, arguments for several more rate hikes are becoming weaker. That said, the ECB is likely to ignore this.   Macro developments since the May meeting have clearly had more to offer the doves than the hawks at the ECB. Headline inflation has continued to come down but remains far off 2%, survey-based inflation expectations have also started to slow, growth has disappointed and confidence indicators seem to have peaked. In previous times, such a backdrop would have been enough for the ECB to consider pausing rate hikes and wait for the effects of the rate hikes so far to fully unfold. However, the ECB is fully determined right now to err on the side of higher rates.   Minutes of May meeting point to ongoing tightening bias This tightening bias was also reflected in the minutes of the ECB’s May meeting. The surprisingly weak Bank Lending Survey ahead of the last meeting clearly scared some ECB members enough to slow the pace of rate hikes but not enough to start thinking about an end to, or at least a pause in, the hiking cycle. In fact, a large number of ECB members assessed the risks to price stability as being clearly tilted to the upside over the policy-relevant horizon.   High underlying inflation and stubbornly high core inflation were the main reasons behind the ECB’s view that the conditions were not in place to “declare victory” or to be complacent about the inflation outlook.     Staff projections won't bring substantial change Next week’s meeting will also bring a new round of ECB staff projections. While gas prices have dropped further since the last projections in May, oil prices are broadly back at where they were in March. Market interest rates have also hardly changed and only the slightly weaker euro could technically add some inflationary pressure. At the same time, however, it will be interesting to see how the ECB is dealing with the disappointing soft and hard macro data of late.   Remember that back in March, the ECB expected eurozone GDP growth to return to its potential quarterly growth rate of 0.4% quarter-on-quarter from the third quarter of 2022 onwards. This was a surprising forecast given the delayed adverse impact from monetary policy tightening and ongoing structural transitions. It was also remarkable as at the same time, inflation was forecast to return to 2% by the end of 2025. An economy growing at full speed which also gradually allows inflation to disappear is a very unlikely phenomenon.     For next week, we expect slight downward revisions to the ECB’s GDP growth forecasts for this year and next but hardly any revisions to the inflation forecasts. This would mean that the ECB sticks to the 2025 forecast of 2.1% for headline and 2.2% for core inflation.     Hiking will continue, and not only next week Despite the recent decreases, actual headline and core inflation and expectations for inflation only to return to target in two years from now are clear arguments for the ECB to not only continue hiking by 25bp next week but to also keep the door open for rate hikes beyond then.   However, the eurozone economy has turned out to be less resilient than anticipated a few weeks ago and confidence indicators, with all the caveats currently attached to them, point to a weakening of growth momentum again. As headline inflation is gradually retreating, the risk increases that any additional rate hike could quickly turn out to be a policy mistake; at least in a few months from now. Still, the ECB simply cannot afford to get it wrong again.     This is why they are putting more than usual emphasis on actual inflation developments. Even if this completely contradicts forward-looking monetary policy, the ECB is in no position to take a chance and is not giving any impression that it might look back in anger.  

Bank lending to households maintained its downward trend, and May brought the first Month-on-Month decline in household borrowing since the first lockdown in 2020. That was exceptional, of course, and before then, we only witnessed monthly declines in household borrowing in the depth of the euro crisis. The impact can be seen in housing markets where prices and transaction volumes are trending down and will feed through to the rest of the economy. Deposits by households increased by 1 billion in May, after declines in March and April. This suggests that the effects of the banking turmoil in the eurozone have remained very limited. Broad money growth was down again in May, bringing the annual growth rate down from 1.9% in April to 1.4%. Narrow money growth (M1) saw the annual downturn deepen from -5.2 to -6.4%, the sharpest drop in history. While there are circumstances that make the impact of this smaller or more dragged out than in previous episodes of monetary contraction, it remains a signal that tightening is well under way. Overall, the eurozone economy is currently in a roughly stagnant growth environment. The fast-paced rate hikes are set to still have a further dampening effect on economic activity as monetary transmission continues to work its way through the system. This leads us to believe that growth is set to remain sluggish at best for the foreseeable future. Still, today’s numbers do not show a cliff-edge drop that would change the ECBs thinking on further rate hikes.

Lagarde signals ECB rate hike in July Germany releases inflation report later on Thursday Eurozone inflation report follows on Friday EUR/USD is unchanged on Thursday and is trading at 1.0912 in the European session,   German CPI  Germany releases the June inflation report later today. Inflation in the eurozone’s largest economy fell to 6.1% in May, down sharply from 7.2% in April. Much of the decline, however, was driven by lower energy prices. Inflation is expected to head higher, with a consensus of 6.3%. If CPI surprises to the downside, the euro could get a boost.   Lagarde signals rate hike in July Investors were hoping to gain some insights this week from ECB President Lagarde, who hosted the ECB Bank Forum in Sintra. There really wasn’t anything new in her remarks, which may have been disappointing to some. One could make the argument that Lagarde is being consistent in her message to the markets and used the Sintra meeting to reiterate the ECB’s intent to raise rates at the July 27th meeting, unless there is an unexpected drop in inflation, in particular the core rate. Lagarde stated on Wednesday that the central bank is not considering a pause in July as things currently stand. At the same time, Lagarde has some wiggle room, as she has said each rate decision will be data-dependent. The ECB has an entire month before the next meeting, and if core inflation slides or the eurozone economy takes a turn for the worse, the ECB could pause, arguing the conditions were appropriate for holding rates steady. Lagarde & Co. will get a look at eurozone inflation data on Friday. Headline inflation is expected to fall to 5.6% in June, down from 6.1% in May. Core CPI is projected to rise from 5.3% to 5.5%.   EUR/USD Technical EUR/USD is putting pressure on resistance at 1.0916. This is followed by 1.0988 1.0822 and 1.0750 are providing support    

Eurozone economy returns to positive growth but underlying weakness remains GDP growth beat expectations at 0.3% quarter-on-quarter in 2Q, but underlying weakness remains significant. For the data-dependent European Central Bank, this GDP reading will not be a dovish argument at the September meeting, leaving a further hike on the table.   After GDP declined in the fourth quarter and stagnated in the first, it increased by 0.3% quarter-on-quarter in the second quarter. This was better than expected but also boosted by very strong Irish activity, which is known to be volatile on the back of multinational accounting activity. Without Ireland, growth would have been halved. Looking through the most volatile components, we argue that the economy has remained broadly stagnant. Still, for the ECB this will not be the main argument to pause in September.   The buoyant reopening phase is behind us and the effects of high inflation, weak global demand and monetary tightening are resulting in a phase of sluggish economic activity. While the labour market continues to perform very well, a recession is never far away in this type of environment and remains a clear downside risk for the quarters ahead. The differences between countries are large in terms of performance. The German and Italian economies continue to suffer, in part because their manufacturing sectors are larger and demand for goods remains in contraction. Germany saw flat GDP growth quarter-on-quarter after two quarters of negative growth, while Italy dipped back to -0.3%. On the other hand, France and Spain continued to perform well. French GDP growth accelerated from 0.1 to 0.5%. Spain saw growth decelerate from 0.5 to 0.4%. Judging by the survey data we have so far on the third quarter, the risks are to the downside for the coming quarters. Manufacturing performance continues to slump as new orders continue to weaken and strong services performance is waning as reopening effects from the pandemic fade. With monetary tightening still expected to have its most dampening effect on growth later, continued broad stagnation of economic activity remains the most likely outcome for the coming quarters.

Eurozone core inflation surprises on the upside Eurozone GDP accelerates to 0.3% The euro is showing little movement on Monday. In the North American session, EUR/USD is trading at 1.1023, up 0.06%. It has been a wild ride for the euro over the past two weeks. On July 18th, EUR/USD hit its highest level since February 2022, but the same day, the euro began a slide which saw it drop almost 300 points. Interestingly, the euro had a muted reaction to Monday’s eurozone inflation and GDP reports. Eurozone inflation for June was within expectations. Headline CPI dropped from 5.5% to 5.3% y/y, matching the consensus estimate. Core CPI remained steady at 5.5%, a notch higher than the consensus of 5.4%. Core CPI, which is closely watched by the ECB, hasn’t improved much from the 5.7% gain in March, which marked a record high. The inflation report shows that inflation remains stubbornly high, and will provide support to ECB members who favor a rate hike at the September meeting. The ECB raised interest rates last week, which came as no surprise as the ECB had signalled that it would do so. What happens next is anyone’s guess. ECB Lagarde said at last week’s meeting that “the September meeting will be deliberately data-dependent”. This didn’t clear up any uncertainty or really say anything, as the ECB has abandoned forward guidance and made rate decisions based on key data, especially inflation and employment reports. The ECB could go either way in September – inflation remains well above the 2% target, which would support a hike, but the eurozone economy remains weak and some members may wish to pause in order to avoid a recession. There was a bright spot in Monday’s releases as eurozone GDP rose to 0.3% in the second quarter, up from 0.0% in Q1. We’ll get a look at German and eurozone Manufacturing PMIs on Tuesday. EUR/USD Technical EUR/USD is testing resistance at 1.1037. The next resistance line is 1.1130 There is support at 1.0924 and 1.0831    

EUR: Hard to see it trade out of range According to our short-term fair value model, EUR/USD’s equilibrium level currently sits around 1.0950, quite close to spot. The pair remains overbought according to CFTC positioning data (+23% of open interest), but there are clear indications that the process of adding EUR longs/building USD net shorts has stalled again in July. All in all, it appears that EUR/USD has managed to navigate the worst (barring new volatility peaks) of the US bond sell-off relatively easily, a sign that markets remain reluctant to let go of a cyclical currency like the euro in the current market environment (despite a deteriorating outlook for the eurozone economy) and the room for a big dollar recovery remains still narrow given markets now expect the Fed to be done with monetary tightening. We had warned our readers that August might well have been a directionless month for EUR/USD: things can change (developments in the Russia-Ukraine conflict should be followed closely, to name one), but we have not received any strong indication so far that EUR/USD may materially drift away from a 1.09-1.11 range this month. Today, some focus will be on the ECB’s Consumer Expectation Survey, which includes inflation expectation figures, and final CPI numbers for July in Germany and other EU countries.  

The resilience of the eurozone's economy breeds complacency. This is an extremely dangerous feeling given the ongoing monetary policy tightening by the European Central Bank, which is in effect with a time lag. According to Bloomberg's research, a 425 bps increase in the interest rate since the beginning of the cycle will harm the currency bloc's GDP by 3.8%. Taking into account the negative impact of the energy crisis and the withdrawal of fiscal stimulus measures, this figure will rise to 5%. It's no wonder that members of the Governing Council are starting to doubt whether monetary tightening should be continued in September, and EUR/USD is falling.     In reality, most investors, according to ING's opinion, still believe that the euro will rise against the US dollar by the end of the year. Bloomberg's expert consensus on the main currency pair stands at 1.12. Moreover, the corrections of 5% in February, 4% in May, and 3% in July-August in EUR/USD indicate the strength of the uptrend. It is becoming more challenging for the bears to push the quotes lower. However, expectations are one thing, and reality is another.   Strengthening the euro requires an improvement in the health of the global economy. Then procyclical currencies will become the favorites. Unfortunately, this is not happening at the moment. Meanwhile, the strength of the US labor market makes the Federal Reserve keep its finger on the pulse. FOMC official Michelle Bowman believes that the central bank will need to raise the federal funds rate from 5.5% to 5.75%. The US dollar is supported by a favorable external backdrop, such as rising bond yields due to massive Treasury issuances, credit rating downgrades by Fitch, and the start of the normalization of the Bank of Japan's monetary policy.   At the same time, there is a pullback in stock markets that have been surging for five consecutive months. The worsening global risk appetite is a powerful driver of EUR/USD's decline. In this scenario, investors' demand for the dollar as a safe-haven asset increases. The bears have one more trump card up their sleeve.   Despite the stability of the US economy, the business cycle has not been canceled. 67% of investors-respondents of MLIV PULSE believe that by the end of 2024 a recession will hit the US. Moreover, 20% of those polled predict a recession already in the current year. It's as if they don't believe the Fed, which no longer considers a downturn scenario in 2023.       Thus, the euro is currently not living up to expectations, and the weakness of the eurozone's economy could lead to a premature end to the cycle of monetary tightening by the ECB. On the contrary, the US dollar is in demand among investors due to the strength of the US economy, its safe-haven status, and the rally in Treasury bond yields.   Technically, on the daily chart of EUR/USD, the Three Indians pattern continues to unfold. We successfully utilized the retracement by shorting on the bounce from the resistance at 1.1035. We are holding the position and raising it on a breakthrough below the support level at 1.0965    

EUR: Lagarde can give the euro some relief ECB President Christine Lagarde probably faces a harder task than her US counterpart today. The latest PMIs confirmed the eurozone economy is heading towards a period of sluggish growth, which now makes any hawkish statement a harder sell. At the same time, Lagarde and her ECB colleagues are probably aware that the window for one last hike to curb the still non-negligible service inflation is closing fast. In other words, if the ECB pauses in September, it may well not get a chance to hike any more given the deteriorating economic outlook. As in the case of the Fed, we have already heard from a couple of ECB speakers. Ultra-hawkish member Joachim Nagel unsurprisingly said it’s too early to think about a pause and restated the bank’s data-dependent approach. A slightly more moderate Governing Council member, Boris Vujcic, also echoed such reasoning. Our perception is that Lagarde is unhappy with the market's recent scale-down of rate expectations in the eurozone (a September hike is only 40% priced in), and she may prefer to keep overlooking some evidence of worsening growth and stick with a pure data-dependent approach. Ultimately, if inflation surprises on the upside, the chances of a hike in September would rise quite significantly in our view, especially given the deteriorating growth outlook, which means that could be the ECB’s last chance to raise rates. The EUR-USD two-year swap rate differential has widened (in favour of the dollar) to the 140-145bp levels, which were last seen in February/March. We think there is room for some re-tightening after Lagarde’s speech today, and for EUR/USD to enjoy a relief rally after the break below 1.0800 saw more bearish momentum building overnight.  

EUR: Gearing up for the inflation test We aren't surprised to hear the ECB hawks step in with some strong messaging in support of more tightening as the September policy meeting draws closer. Market pricing for the September meeting is probably what has been bothering the hawkish fringes of the Governing Council. Markets have been quite reluctant to fully price in one last ECB hike, and the implied probability of a September move has been stuck below 50%. Governing Council member Robert Holzmann directly pointed out a high chance of raising rates again, but market pricing has not moved significantly. President Christine Lagarde herself held a generally hawkish tone at her Jackson Hole speech last week and seemed to put little emphasis on the mounting evidence that the eurozone’s economy is rapidly slowing, and there is a need to stick with data dependency. It is clear now that markets are – that is admittedly not too common – fully embracing the data-dependent approach of the ECB policymakers, and are awaiting this week’s inflation figures to make their final call on the September hike. It’s important to set a timeline for this week’s inflation releases: German figures are out tomorrow morning (along with Spain’s), while Thursday sees the release of French, Italian, and then eurozone-wide figures. Consensus expectations are for a slowdown from 5.5% to 5.3% in core CPI inflation, while our economists forecast 5.4%. That should, on the margin, be enough to trigger one last 25bp rate hike by the ECB in September, and we see upside risks for the euro in the near term. A return and stabilisation above 1.0950 and even retesting 1.10 is possible should inflation prove resilient, but much will also depend on US payroll numbers not exceeding expectations.

Key inflation numbers set to tee up ECB for September pause?     By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets underwent a bit of a pause yesterday with a mixed finish, although the FTSE100 did manage to eke out a gain, hitting a two-week high as well as matching its best run of daily gains since mid-July. US markets continued to track higher, with the Nasdaq 100 and S&P500 pushing further above their 50-day SMAs, with both closing at a two-week high, for their 4th day of gains.   As we look towards today's European session, the focus today returns to inflation, and more importantly whether there is enough evidence to justify a pause in September from both the ECB as well as the Federal Reserve, as we get key flash inflation numbers from France, Italy, and the EU, as well as the latest core PCE inflation numbers for July from the US.   Over the course of the last few weeks there has been increasing evidence that the eurozone economy has been slowing sharply, with the recent flash PMIs showing sharp contractions in both manufacturing and the services sector. Other business surveys have also pointed to weakening economic activity although prices have also been slowing, taking some of the pressure off the ECB to continue to hike aggressively.   At the last ECB meeting President Lagarde suggested a pause might be appropriate at the September meeting, acknowledging that policy was starting to become restrictive. We've also seen some ECB policymakers acknowledging the risks of overtightening into an economic slowdown, while on the flip side head of the Bundesbank Joachim Nagel has insisted further rate hikes are likely.   Yesterday's Germany and Spain flash CPI numbers for August highlight the ECB's problem, with Spain CPI edging up in August to 2.4% with core CPI slowing modestly to 6.1%. Headline inflation in Germany only slowed modestly to 6.4% from 6.5%.   Today's headline EU flash CPI numbers are therefore expected to be a key test for the ECB, when they meet on 14th September especially if they don't slow as much as markets are pricing. French CPI is expected to accelerate to 5.4% in August while Italy CPI is forecast to slow to 5.6%.   EU headline CPI is forecast to slow to 5.1% from 5.3%, with core prices expected to slow to 5.3% from 5.5%, although given the divergent nature of the various CPI readings of the big four eurozone economies there is a risk of an upside surprise.    The weaker than expected nature of this week's US economic data has been good news for stock markets, as well as bond markets, in so far it has helped to reinforce market expectations that next month's Fed meeting will see US policymakers vote to keep rates on hold.   A slowdown in job vacancies, a downgrade to US Q2 GDP and a weaker than expected ADP jobs report for August appears to show a US economy that is not too hot and not too cold.   Even before this week's economic numbers the odds had already been leaning towards a Fed pause when the central bank meets in September, even if there is a concern that we might still see another rate hike later in the year.   These concerns over another rate hike are mainly down to the stickiness of core inflation which only recently prompted a sharp move higher in longer term rates, causing the US yield curve to steepen off its June lows. The June Core PCE Deflator numbers did see a sharp fall from 4.6% in May to 4.1% in June, while the deflator fell to 3% from 3.8%.   Today's July inflation numbers could prompt further concern about sticky inflation if we get a sizeable tick higher in the monthly, as well as annual headline numbers, reversing some of the decline in bond yields seen so far this week.   When we got the July CPI numbers earlier this month, we saw evidence that prices might struggle to move much lower, after headline CPI edged higher to 3.2%. This could translate into a similar move today with a move higher to 3.3% in the deflator, and to 4.2% in the PCE core deflator.     Personal spending is also expected to rise by 0.7% in July, up from 0.5% in June. Weekly jobless claims are expected to remain steady, up slightly to 235k.       EUR/USD – the rebound off the 1.0780 trend line support from the March lows continues to gain traction, pushing up to the 1.0950 area. We need to push through resistance at the 1.1030 area, to signal a return to the highs this year.   GBP/USD – another day of strong gains has seen the pound push back above the 1.2700 area. We need to push back through the 1.2800 area to diminish downside risk and a move towards 1.2400.       EUR/GBP – the failure to push through resistance at the 0.8620/30 area yesterday has seen the euro slip back towards the 0.8570/80 area. While the 50-day SMA caps the bias is for a retest of the lows.   USD/JPY – the 147.50 area remains a key resistance. This remains the key barrier for a move towards 150.00. Support comes in at last week's lows at 144.50/60.   FTSE100 is expected to open 6 points higher at 7,479   DAX is expected to open 30 points higher at 15,922   CAC40 is expected to open 13 points higher at 7,377  

EUR: Focus on the eurozone August CPI Flash August CPI data for the eurozone is released at 11:00 am CET today and is expected to show a gradual decline in both headline and core YoY readings to 5.1% and 5.3%, from 5.3% and 5.5% respectively. However, the decline is proving gradual and we are actually starting to see expectations of one more rate hike from the European Central Bank firm up a little. These peak at around 21bp of tightening priced in for January next year. Our macro team feels that the chances of a September rate hike are under-priced (now a 43% probability) meaning that EUR/USD could get a little support from the ECB story over the coming weeks. Today, also look out for a 09:00 am CET speech from ECB hawk Isabel Schnabel, speaking at a conference on 'Inflation: Drivers and Dynamics'. We will also see the ECB minutes for the July policy meeting released at 1:30 pm CET. EUR/USD has turned a little more bid over the last few days as US jobs data has softened the front end of the US yield curve and sticky inflation has kept EUR short-dated interest rates supported. Our short-term Financial Fair Value model sees EUR/USD fairly priced near 1.0900 - suggesting a probably range-bound session into tomorrow's US NFP release. Elsewhere, we note that Switzerland is planning some new large-scale Anti Money Laundering measures for 2024. This may be a slow-burn story, but one which may ultimately weigh on the Swiss franc in 2024.

Remember that 'back to school' feeling at the end of summer? A tedious car journey home after holiday fun, knowing you'll be picking up where you left off? I'm afraid we've got a very similar feeling about the global economy right now. 'Are we nearly there yet?'. No.  Very few reasons to be cheerful Lana del Rey's Summertime Sadness classic comes to mind as we gear up for autumn. And I'm not just talking about chaotic weather or even, in my case, disappointing macro data. Most of us have had the chance to recharge and rethink over the past couple of months. and I'm afraid all that R&R has done little to brighten our mood as to where the world's economy is right now. Sure, the US economy has been holding up better than we thought. And yes, the eurozone economy grew again in the second quarter. Gradually retreating headline inflation should at least lower the burden on disposable incomes. And let's be thankful for the build-up of national gas reserves in Europe, which should allow us to avoid an energy supply crisis this winter unless things turn truly arctic. But that's about as upbeat as I can get. We still predict very subdued growth to recessions in many economies for the second half of the year and the start of 2024. The stuttering of the Chinese economy seems to be more than only a temporary blip; it seems to be transitioning towards a weaker growth path as the real estate sector, high debt and the ‘de-risking’ strategy of the EU and the US all continue to weigh on the country's growth outlook. In the US, the big question is whether the economy is resilient enough to absorb yet another potential risk factor. After spring's banking turmoil, the debt ceiling excitement, and more generally, the impact of higher Fed rates, the next big thing is the resumption of student loan repayments, starting in September. Together with the delayed impact of all the other drag factors, these repayments should finally push the US economy into recession at the start of next year. And then there's Europe. Despite the weather turmoil, the summer holiday season seems to have been the last hurrah for services and domestic demand in the eurozone. Judging from the latest disappointing confidence indicators, the bloc's economy looks set to fall back into anaemic growth once again.   Little late summer warmth This downbeat growth story does have an upbeat consequence; inflationary pressure should ease further. It's probably not going to be enough to bring inflation rates back to central banks’ targets, but they should be low enough to see the peak in policy rate hikes. Central bankers would be crazy to call an end to those hikes officially; they don't want to add to speculation about when the first cuts might come, thereby pushing the yield further into inversion. And there's also the credibility issue - you never know, prices might start to accelerate again. So, expect major central bankers to remain hawkish at least until the end of the year. In our base case, we have no further rate hikes from the US Federal Reserve and one final rate rise by the European Central Bank. However, in both cases, these are very close calls, and the next central bank meetings are truly data-dependent. Sometimes, a Golden Fall or Indian Summer can make up for any summertime sadness. But it doesn’t look as if the global economy will be basking in any sort of warmth in the coming weeks. The bells are indeed ringing loud and clear. Vacation's over; school is here. And while I'm certainly too old for such lessons, I'm taken back to that gloomy, somewhat anxious feeling I had as a kid as summer wanes and the hard work must begin once again.      

The third quarter may still be saved by tourism in the eurozone, but the latest data points to a more pronounced slowdown in the coming months. Inflation is falling, but a last interest rate hike in September is not yet off the table. The European Central Bank will be hesitant to loosen significantly in 2024, limiting the scope for a bond market rally.   Business sentiment in contraction territory In spite of heatwaves and wildfires, the tourist season seems to have been strong in Europe. It has continued to support growth in the third quarter following a better-than-expected growth figure in the second quarter. However, with the end of the summer in sight, we're now beginning to see a more sobering economic outlook emerge. The composite PMI survey for August was certainly a cold shower, falling to the lowest level in 33 months at 47 points. While the figure has already been in contraction territory in industry for some time, it has now fallen below the boom-or-bust level in the services sector. Deteriorating order books weighed on confidence in both the manufacturing and the services sector, which also explains why there were job losses in manufacturing while hiring plans in the services sector were put on a slow burner. This will probably stop the decline in unemployment in the eurozone. Disappointing external demand A softer labour market might lead to higher savings rates, thereby countering the positive impact on consumption of rising purchasing power. At the same time, the much-anticipated export boost is unlikely to materialise as the US economy eventually starts to cool while the Chinese recovery continues to disappoint. Finally, with a rapidly cooling housing market on the back of tighter monetary policy, the construction sector is also likely to see a slowdown. All of this explains why we still don’t buy the European Central Bank's story that economic recovery will strengthen on the back of falling inflation, rising incomes and improving supply conditions. We expect the winter quarters to see close to 0% growth, resulting in 0.6% annual GDP growth for both this year and next year.   Cooling housing market is likely to weigh on construction activity   Inflation is coming down, slowly While inflation is clearly trending down, the pace might still leave the ECB uncomfortable. Industrial goods prices have started to fall, but services prices are still growing monthly above 4% in annualised terms. Negotiated wage growth seems to have reached a plateau just below 4.5%. Still, given the slow productivity growth (with the decline in hours worked as one of the important drags), final demand will have to be very weak to prevent higher wages from feeding into higher prices. We expect headline inflation to hit 2% by the end of 2024, but over the coming months, core inflation remains likely to hover around 5%. As the recent trend in underlying inflation is one of the key determinants of monetary policy, this would lead to an additional rate hike.   Loan growth is close to stalling The ECB's job is almost done With credit growth now close to a standstill and money growth negative, there remains little doubt that monetary policy is already sufficiently restrictive and that the monetary transmission mechanism is working. On top of that, the median consumer inflation expectation for the period three years ahead fell back to 2.3% in June. So, it looks as though the job is nearly done. For now, we're still pencilling in a final 25 basis point hike for the ECB's September meeting – but it's a very close call. A pause would likely mean the end of the tightening cycle, as the faltering recovery will make it harder to continue raising rates afterwards. While we see the first rate cut by the summer of 2024, we can't imagine the central bank loosening aggressively next year. In her speech at Jackson Hole, President Christine Lagarde mentioned a number of structural changes that make the medium-term inflation outlook more uncertain, and we think that the ECB will keep short rates relatively high for some time to come. That will probably limit the potential for the bond market to rally strongly in the wake of the expected economic stagnation later this year.    

EUR/USD upside potential remains sizable Our economics team remains of the view that markets are underestimating the downside risks facing the US economy and that the Fed will need to implement significant rate cuts from the first quarter of 2024. Despite a deteriorating outlook for the eurozone economy, we only expect the ECB to begin to ease policy in the summer of 2024. Based on that, we anticipate the EUR/USD two-year real rate gap narrowing to zero by the end of 2024, allowing the pair to comfortably trade above 1.15. A broad-based dollar decline should translate into a recovery in the currencies hit most during the period of Fed tightening. We expect Scandinavian currencies to rebound from next quarter, although the Swedish krona’s grim domestic outlook means the road should be bumpier compared to its Norwegian peer. The Australian and New Zealand dollar need to wait for some recovery in Chinese sentiment before unlocking “recovery mode”, while the pound remains tied to market expectations for Bank of England tightening that we still deem too hawkish. USD/JPY should remain the barometer of market sentiment on US yields: a turn lower is long due on the overbought pair, but may need to wait later this year given the Bank of Japan’s lingering easing bias. As for emerging market currencies, monetary stimulus will keep the renminbi soft and will also see Asian currencies lag in any rebound against the dollar later this year. Better positioned remain some currencies in the CEE space and Latam (eg Hungary, Brazil) where real rates remain deeply positive despite the start of easing cycles this year.  

ECB minutes confirm hawkishness amid growing concerns about growth The just-released minutes of the European Central Bank's July meeting illustrate the slightly changed tone; from pure hawkishness to more doubtful.   At the European Central Bank's July meeting, the central bank hiked interest rates by 25 basis points before stopping the autopilot, with President Christine Lagarde stressing that both a pause and a rate hike were possible at the September meeting. The just-released minutes of this July meeting give some background to these decisions. The minutes show an ECB that was still more concerned about inflation not returning to target than an economy falling into recession.   Here are some key phrases from the minutes: “Headline inflation on an annualised three-month over three-month basis was about 2% in June, reflecting the strong negative momentum in energy inflation.” “It was also noted that the three measures identified by staff as performing best as indicators of medium-term inflation were currently pointing in different directions, with the PCCI declining swiftly, while HICP inflation excluding energy, food, travel-related items, clothing and footwear and the measure of domestic price pressures still pointed to the upside.” “However, in view of the still elevated inflation outlook, together with the weaker growth outlook, the concern was also raised that the economy might be entering a phase of stagflation, in contrast to a more benign scenario of a soft landing.” “In view of the prevailing uncertainties and the large costs of bringing inflation down once it had become entrenched, it was argued that it was preferable to tighten monetary policy further than to not tighten it enough. Before deciding to stop the tightening cycle, the Governing Council needed clearer signs of whether inflation would converge to target once the effects of recent shocks had faded.” “Taken together, the September projections, the evolution of underlying inflation and incoming information on monetary transmission would help the Governing Council update its assessment of the appropriate monetary policy stance.”   The minutes also suggested that as long as the eurozone economy doesn’t slide into a full recession, the ECB could have a higher-than-expected tolerance for growth disappointing and coming in weaker than its own forecast. A remark was made that the ECB’s inflation forecasts had been more reliable recently than the growth forecasts. The fact that underlying inflation remained high and growth was not weak enough pointed to a subtle hawkishness, even though at least one ECB member seemed to have opposed the 25bp rate hike decision initially.    

Labour shortages are mainly being driven by lower average hours worked Despite the fact that the eurozone economy has broadly stagnated, job creation remains strong and the eurozone labour market seems to be tighter than ever. The good news is that the unemployment rate has fallen to a historic low of 6.4% on the back of this. At the same time, eurozone enterprises now see labour as the largest supply-side problem hindering their business, and the ECB worries that the tight labour market will keep inflation above target for longer. Clearly, the labour market is one of the most important parts of the economy to watch at the moment. Strong economic recovery and ageing populations are often cited as the key reasons for labour shortages. What is often overlooked is the lower number of average hours worked per person that has occurred since the pandemic. While the ECB has previously written about it and President Christine Lagarde mentioned it in her Jackson Hole speech, the extent of the impact of this is very large. The average number of hours worked per person was fairly stable between 2013 and 2019. It experienced a large drop during the pandemic – which was mainly caused by the massive take-up of furlough schemes – but has never fully recovered since. While the recovery is still ongoing, the trend has slowed substantially. This means that more people are needed to do a similar amount of work. At the moment, this equates to 3.8 million more people employed than if everyone was working the average amount of hours they did in the years before the pandemic   The gap in average hours worked amounts to 3.8 million more people in work   This excess of 3.8 million workers equates to about two percentage points of unemployment, adding to a substantial easing of labour shortages. Of course, a lot of people would not have been looking for work in an environment that was not this exceptionally tight, however even using the Abel and Bernanke (2005) Okun’s Law estimate, we find that recent GDP growth should roughly correlate with an unemployment rate of 7.5%. This is by no means high, but it is high enough to not generate meaningful wage pressures, according to the European Commission’s natural unemployment rate estimate. So, the argument that the current economy is so strong that it causes labour shortages does not really hold up, especially given the fact that total hours worked have only just breached pre-pandemic levels. Ageing populations – which are expected to cause the active population to shrink over time – are also not a reason for current shortages, as the number of people at work and looking for work has never been higher than it is now. The main cause for shortages seems to lie in lower average hours worked.   An Okun's law estimate would currently put eurozone unemployment at 7.5%

The euro has started the week with gains, after falling around 1.3% over the past two days. In the North American session, EUR/USD is trading at 1.0795, up o.19%. With US markets closed for the Labour Day holiday, we can expect an uneventful day from the euro. Will she or won’t she? ECB President Christine Lagarde has avoided giving a clear signal about the ECB rate decision on September 14th. At the Jackson Hole symposium, Lagarde said that rates would have to remain at “sufficiently restrictive levels for as long as necessary” in order to bring down inflation to the ECB’s 2% target. Eurozone inflation remained stuck at 5.3% in August, which is more than double the target. Given that disparity, one could be forgiven for assuming that Lagarde would have followed up with a heavy hint about a rate hike in September. Instead, she steered clear of the rate debate. Fast forward to today, when Lagarde delivered a speech in London. The pattern was the same – a declaration that “we will achieve a timely return” to the 2% inflation target, but no mention of the September meeting. The lack of direction from Lagarde could mean that the doves and hawks continue to push their agendas and Lagarde hasn’t decided which way to roll the dice. Inflation remains high, but the eurozone economy is not in the best shape, which means that further rate hikes could trigger a recession. On Monday, ECB Governing Council member Mario Centeno, the head of the Bank of Portugal, warned there was a risk of “doing too much” by continuing to raise rates.   The manufacturing sector in Germany and the eurozone remains mired in contraction, as last week’s PMIs indicated. The services sector has been in better shape with readings above 50.0, which indicates expansion. Still, Service PMIs have been weakening in recent months and are expected to fall into contraction territory in both Germany and the eurozone on Tuesday.  The consensus for September stands at 47.3 in Germany and 48.3 in the eurozone, which would confirm the initial estimates last month. If investors show jitters over contraction in the services sector, the weak euro could lose ground. . EUR/USD Technical There is resistance at 1.0831 and 1.0889 1.0716 and 1.0658 are providing support    

The previous trading week was filled with important events and reports. When looking at the range and movements of both instruments, one might wonder: why was it so subdued? It was reasonable to expect stronger movements and market reactions. To briefly recap, key reports from the United States turned out weaker than market expectations. Even the stronger ones left a peculiar impression. GDP grew by 2.1% in the second quarter, not the expected 2.4%. The ADP report showed fewer new jobs than expected. Nonfarm Payrolls reported more jobs, but the previous month's figure was revised downward. The ISM Manufacturing Index increased but remained below the 50.0 mark. The unemployment rate rose to 3.8%, which few had anticipated.     Based on all these reports, one might have assumed that it was time to build a corrective upward wave, but on Thursday and Friday, the market raised demand for the US dollar, so both instruments ended the week near their recent lows. So what can we expect this week?   On Monday, the most interesting event will be European Central Bank President Christine Lagarde's speech. On Tuesday, another speech by Lagarde, as well as Services PMIs of the European Union, Germany, and the United Kingdom. We can also expect speeches by other members of the ECB Governing Council. I advise you to monitor the information related to Lagarde's speeches. If she softens her stance, it can have a negative impact on the euro's positions. Wednesday will begin with a report on retail trade in the EU and end with the US ISM Services PMI. We can consider the ISM report as the main item of the week, although the ISM Manufacturing PMI that was released on Friday did not stir much market reaction. It is likely that the index will remain above the 52.7 mark, which is unlikely to trigger a market reaction. On Thursday, you should pay attention to the final estimate of GDP in the second quarter for the European Union. If it comes in below 0.3% quarter-on-quarter, the market may reduce demand for the euro. The US will release its weekly report on initial jobless claims. On Friday, Germany will publish its inflation report for August, and that's about it. There are hardly any important events and reports this week. Based on the conducted analysis, I came to the conclusion that the upward wave pattern is complete. I still believe that targets in the 1.0500-1.0600 range are feasible, and I recommend selling the instrument with these targets in mind. I will continue to sell the instrument with targets located near the levels of 1.0637 and 1.0483. A successful attempt to break through the 1.0788 level will indicate the market's readiness to sell further, and then we can expect the aforementioned targets, which I have been talking about for several weeks and months.     The wave pattern of the GBP/USD pair suggests a decline within the downtrend. There is a risk of completing the current downward wave if it is d, and not wave 1. In this case, the construction of wave 5 might begin from the current marks. But in my opinion, we are currently witnessing the construction of the first wave of a new segment. Therefore, the most that we can expect from this is the construction of wave "2" or "b". I still recommend selling with targets located near the level of 1.2442, which corresponds to 100.0% according to Fibonacci  

ECB cheat sheet: Is a hike hawkish enough? Markets are torn. Will the ECB hike this week or not? We think it will, but we look at how different scenarios can impact rates and FX. Even in our base case, we suspect that convincing markets that this is not the peak will be very hard, and dovish dissenters may get in the way. The upside for EUR rates and the euro may not be that big and above all, quite short-lived.       As discussed in our economics team’s European Central Bank meeting preview, we narrowly favour a rate hike this week. The consensus of economists is slightly tilted towards a hold, and markets also see a greater chance of no change (60%). In the chart above, we analyse four different scenarios, including our base case, and the projected impact on EUR/USD and 10-year bunds. We expect to see a more fragmented than usual Governing Council at this meeting. Whichever direction the ECB decides to take, the debate will likely be fiercer than in previous meetings, as lingering core inflationary pressure is being counterbalanced by evidence of rapidly worsening economic conditions in the euro area. Accordingly, expect the overall messaging by the ECB to be influenced not only by the written communication but also by: a) how much President Christine Lagarde manages to conceal growing division and disharmony within the Governing Council during the press conference and; b) any post-meeting “leaks” to the media, which could be used by dissenters to influence the market impact.        

EUR: High ECB inflation forecasts provide a little support The euro received a little support overnight on a Reuters report that the new European Central Bank staff projections being released tomorrow would forecast CPI above 3% next year, compared to expectations of 2.7%. The implication here is that, based on these forecasts, the ECB would likely be more hawkish and supportive of the euro. As we discuss in our ECB cheat sheet, there are many moving parts to tomorrow's meeting. However, the biggest part should be a 25bp rate hike – which is only 54% priced – and a factor that should see EUR/USD hold support down at 1.0700. Chris Turner    

Why a slowdown in Spanish growth could be here to stay Spain's economy grew by 0.3% in the third quarter, a slowdown from 0.5% growth in the second quarter which we think is likely to continue in the coming months.   Spanish economy grows 0.3% in third quarter As expected, Spanish GDP grew 0.3% quarter-on-quarter in the third quarter, according to figures released this morning by Spain's statistical service INE. This is a cooling off from the first half of the year. In the second quarter, the Spanish economy still grew by 0.5% QoQ. On an annual basis, Spain's third-quarter economic output expanded by 1.8%. Growth was mainly driven by domestic demand – more specifically, consumption –  while business investment contracted and government spending slowed in the third quarter. Looking at the different sectors, these levels were sustained by the growing services sector, while manufacturing and construction contracted last quarter.   Spanish economy more buoyant than rest of eurozone despite slowdown Despite slowing down, Spain is expected to head for growth of 2.5% in 2023, well above the 0.5% growth forecast for the eurozone. Due to some favourable structural differences, Spain's economy has proved much more resilient than other countries. The larger weight of the tourism sector underpinned growth. Spain experienced a strong tourism season and benefited from a further recovery of all tourism-related activities to their pre-Covid levels. In addition, the struggling manufacturing sector has a smaller weight in Spain. Manufacturing represents only 12% of gross value added, significantly less than the 22% in the German economy, for example. Finally, the Spanish economy is much less exposed to the ailing Chinese economy than others.   Increasing headwinds for the economy in coming months We expect the slowdown to continue. The European Central Bank's tightening cycle has taken a lot of oxygen out of the economy, and we'll surely begin to feel the impact in the coming months. The ECB's latest bank lending survey released on Tuesday shows credit standards tightening further and credit demand from businesses and households fell sharply in the third quarter in Spain, which does not bode well for investment activity. In addition, household finances will come under more pressure in the coming months. Spanish growth was boosted this year by a recovery in purchasing power thanks to higher nominal wage growth, strong job growth and cooling inflation. However, jobs growth is slowing, with higher interest rates and increased fuel prices also threatening to put pressure on household finances. This is certainly the case for households that financed the purchase of their home with variable interest rates (around a third of all households), who will have less budget left over to spend. Lastly, the contribution of the tourism sector will also be smaller next year now that the sector is roughly back to its pre-Covid level. In addition, we should not expect a strong rebound for the manufacturing sector. The manufacturing sector is struggling with dwindling order books and energy-intensive companies are still struggling with a competitiveness handicap. Add to this a slowing global economy, with a stagnant eurozone economy, a US economy that seems to be at its peak and a Chinese economy struggling to get up to speed, and a further slowdown in the coming months seems likely. All of these headwinds will curb Spain's growth momentum. While we still assume an average growth rate of 2.5% for 2023, we expect it to slow to 1.2% next year.  

EUR: Orderly inflation outcome EUR/USD remains well bid, but should struggle to better resistance at 1.0965/1000 this week. As mentioned above, we think the dollar sell-off may not have legs since the short end of the US rates curve is still pretty firm. From the eurozone side, this week's data highlight will be flash CPI for November set to be released on Thursday. Here, further disinflation is expected in both headline and core readings, bringing year-on-year rates back to 2.7% and 3.9%, respectively. These readings might tend to support the 70bp of the European Central Bank (ECB) easing priced into eurozone money markets next year.   Additionally, expect investors to keep one eye on fiscal developments in Germany. It is unclear from where a political solution will emerge and will do little to discourage views of a stagnant eurozone economy in early 2024. Overall, we favour EUR/USD correcting to the 1.0825/50 area this week.  EUR: Orderly inflation outcome EUR/USD remains well bid, but should struggle to better resistance at 1.0965/1000 this week. As mentioned above, we think the dollar sell-off may not have legs since the short end of the US rates curve is still pretty firm. From the eurozone side, this week's data highlight will be flash CPI for November set to be released on Thursday. Here, further disinflation is expected in both headline and core readings, bringing year-on-year rates back to 2.7% and 3.9%, respectively. These readings might tend to support the 70bp of the European Central Bank (ECB) easing priced into eurozone money markets next year.   Additionally, expect investors to keep one eye on fiscal developments in Germany. It is unclear from where a political solution will emerge and will do little to discourage views of a stagnant eurozone economy in early 2024. Overall, we favour EUR/USD correcting to the 1.0825/50 area this week.