ECB Monetary Policy Announcement
Despite inflation currently standing at a record high across the Eurozone (hitting 8.1% during May), the prevailing market consensus is that the ECB will keep their base interest rate unchanged at 0% ahead of signalling a 25bpt rise in July and two subsequent 0.25% hikes in the two meetings thereafter.As such the market’s key focus will be on the ECBs policy vis-à-vis the APP and PEPP programmes which form the largest part of their QE balance sheet and are expected to end later today. The EBC are also expected to end their corporate bond-purchasing programme, under which the level of companies’ debt owned by Frankfurt has risen from a pre-pandemic level of €140bn to €341bn today. As one analyst from the Bank of America said, under this scheme the ECB has become not merely become just “the buyer of last resort but the buyer of first resort” and as such many within the sector are concerned that the loss of the ECBs demand will lead to a significant shortfall in the corporate bond-purchasing world.

Given rising speculation over the ECBs next move regarding their balance sheet, bond markets have seen some volatility with for example the risk spread between Italian and German ten-year bonds growing to 200bpts – a considerable adjustment from around 140bpts earlier this year.

A not insubstantial number of analysts are also speculating on whether the ECB may look at a 50bpt rise in July, with many considering how the weakened euro may play into policy makers decisions over rates. Indeed, with the Euro having lost around 6% of its value against the USD, the cost of the EU’s imports has risen sharply in recent months further feeding into inflationary pressures. Nevertheless, the prevailing market consensus is that the ECB will go ahead with incremental hikes of 25bpts bringing the rate to around 2% by Q2 2023. Of course Lagard previously stated that the deposit rate (currently at -0.5%) would likely be at zero or “slightly above” zero by the end of Q3 2022, though the market is similarly expecting that Frankfurt maintains the status quo while signalling for a hike of the deposit rate at their next meeting on 21st July.

CNBC has more:


Eurozone Growth
Frankfurt is also poised to revise down their 2022 growth forecasts for the 19-member euro area. Such expectations have already been slashed, falling from a forecast 4% in February to 2.7% in recent weeks as the bloc considers the impact of rising inflation, persistent supply chain issues and the prevailing risk off sentiment brought about by the conflict in Ukraine.


Turbulent Forecast for UK Economy
Yesterday, the OECD followed suit with other international organisations in predicting that the UK economy would have the lowest level of growth amongst the G7 next year. The Parisian headquartered think-tank now estimates that the UK will experience 0% growth over the course of 2023, while they slashed this year’s forecasts from 4.7% (made in January) to 3.6% citing issues over inflation, supply chains, loss of investment and trade. This news saw the FTSE 100 index drop round 21pts as investors weighed on stagflation fears, while the FTSE all share is down by around half a percent over the last day. Such assessments follow record low levels of consumer confidence, falling real wages and concerns over the UKs future post-Brexit trading relationships.

The BBC has more:


Jumps at the Pumps
Petrol prices saw the largest intra-day jump in 17 years as the average price rose above 180.73 pence per litre while diesel rose above 186.57 pence per litre. This means that the cost of filling up an a 55-litre family car with petrol is now edging closer to £100, while diesel has breached this key level and is now at £102.61. Earlier in the year, government announced a five pence reduction in fuel duty, however recently the Competition and Markets Authority (CMA) stated that it found sufficient evidence that this cut had not been passed on to consumers. This comes at a time when BP’s latest results recorded the highest profit in eight years, with the energy giant achieving $12.85bn in profit for the calendar year of 2021 while Shell’s profits soared to £14.3 in 2021.

More generally, WTI crude futures have risen above $122dpb this morning as investors weigh on Covid restrictions being eased in China, low inventories and OPEC’s below-target production.

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Have a great day.


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