ECB Monetary Policy and US Growth in Focus

Lagarde Discusses Eurozone Growth

Regarding growth, Lagarde stated that “economic and inflation outlook remain highly uncertain”. As such, Lagarde continued maintaining that “the near-term economic outlook for the euro area has deteriorated, owing largely to weaker domestic demand high inflation and tighter financing conditions are dampening spending”. Lagarde comments come as Germany entered a technical recession earlier this year and growth concerns continue to make headlines. For example, earlier this week, the HCOB PMI Index for manufacturing, (which accounts for about a fifth of Germany’s economy), fell to 40.6 from 43.2 in May, marking its fifth consecutive monthly decline.

US Growth Surpasses Expectation

US GDP figures for Q2 2023 surpassed expectations yesterday, hitting 2.4% – a considerable increase from Q1’s 2% print. This came well above the general market consensus of 1.8% and gives investors confidence over the resistance of the world’s largest economy, despite the tight fiscal and monetary conditions. With the US raising rates by 25bps on Wednesday, the Fed’s benchmark rate is presently at a 22 year high, though with headline inflation continuing to fall, markets are weighing on whether this will mark the terminal rate. However, with growth remaining resilient, many economists are concerned that this will make the Fed’s challenge of brining inflation back down to its 2% target difficult.

Biden was quick to attribute the strong growth to his administration, stating that “It is Bidenomics in action, growing the economy from the middle out and bottom up, not the top down”.

With focus shifting from growth to interest rate expectations, the yield on the US 2-year T-bill (which is more sensitive to rate hike expectations) rose 10bps to 4.93%. This fed into pressure on equities with the S&P 500 and Nasdaq falling around 0.6%.