ECB Rate Hike in Focus

Yesterday the ECB met market expectations by raising their interest rates by 25bps.

ECB Raise Rates 25bps

This brings the interest rate on their main refinancing operations to 4%, as it hits its highest level since the GFC. Meanwhile rates on the ECB’s deposit facility now stand at 22-year highs of 3.5% having come up from -0.5% within a year. With the ECB raising rates by 400bps over the last twelve months, yesterday’s decision marked a continuation of their most aggressive tightening cycle in history.

Yesterday’s rate hike was accompanied by hawkish undertones, with Frankfurt signalling that it will likely conduct a further hike in their July meeting unless there was a “material change”. This comes as core inflation remains at 5.3% on an annualised basis across the eurozone, while headline (which includes food and energy indexes) is at 6.1, well in excess of the ECB’s target of 2%. Accordingly, Christine Lagarde told the press conference, “Are we done? Have we finished the journey? No. We’re not at our destination. Do we still have ground to cover? Yes, we still have ground to cover,”. As such, JP Morgan are now projecting two additional hikes of 25bps from ECB in July and September.

With policy makers and investors weighing on the impact rising cost of borrowing, the ECB also downgraded growth forecasts while upwardly revising inflation expectations. In terms of inflation, policy makers are now expecting headline inflation to average 5.4% over this year, ahead of dropping to 3% in 2024 and 2.2% in 2025 as food and energy prices correct themselves. Meanwhile, they are forecasting the Eurozone economy to expand 0.9% over 2023, 1.5% over 2024 and 1.6% over 2025. While this is a slight downward revision form their March predictions, the Eurozone has experienced a softer-than-expected landing moving into 2023 despite its largest player Germany now in a technical recession.

TTF Gas Futures Rise on Supply Side Concerns

Yesterday, TTF gas futures (the European benchmark) continued to rally as investors weighed in gas security across the continent moving into Winter. Here, investors considered the impact that a potential closure of the Netherlands’ Groningen gas field would have on supplies throughout Europe, as reports of its possible closure at later this year due to the risks of earthquakes circulated. This comes as Norwegian gas supplies have also reduced output.

Accordingly, TTF gas futures rallied as much as 27% during yesterday session as they edged close to €50 per megawatt hour, its greatest level since April. This now means that wholesale gas prices have doubled within the last ten sessions, though prices remain held up by strong gas storage levels. Currently, EU gas storage remains at around 72%, well above the average for this time of year as Brussels aims to ensure its target of 90% storage by the onset of winter is met.

European Semiconductor Onshoring

US chipmaker Intel are said to be close to finally agreeing a €10bn grant from the German government to build a semiconductor manufacturing facility in Magdeburg. The negotiations between the parties have been ongoing for more than a year and in that time the grant amount has increased from less than €7bn due to inflation and rising energy costs in the country. Intel is investing heavily in Europe, a key consumer of microchips, and will be building multiple sites in the coming years – providing governments are willing to put their hands in their pockets. Germany auto manufacturers were hit hard when Covid supply chain disruptions made semiconductors either unavailable or extremely expensive and will no doubt welcome the onshoring of key components.

Last month the UK government announced £1bn of investment allocation over the next ten years to the space, though with that mostly going towards R&D and scale-up investment, rather than significant manufacturing capabilities. Unsurprisingly, industry figures have said this is nowhere near enough, with Europe committing closer to £40bn and the US doing similar.