ECB shows markets who’s boss

  • We expect the ECB to hike by 50bp and to clarify the specifics of its quantitative tightening programme, in particular in relation to the portion of APP portfolio redemptions to be reinvested.
  • We expect another markedly hawkish press conference, particularly if the ECB is unhappy with the way markets have responded to a potentially weaker January inflation print.
  • At its December meeting, the ECB chose not to surprise markets, and hiked by “only” 50bp, falling short of our expectation of a 75bp hike. That said, it was far from a dovish pivot on rates. As Madame Lagarde made clear in her own words, “we have more ground to cover, we have longer to go”. 

A very British problem

  • In the euro area, January surveys, on the whole, continued to show improvement. Of note, however, is that price balances remain strong, with output prices having risen.
  • Otherwise, we expect a showdown between the ECB and markets at its February meeting on the market pricing of near-term hikes and market pricing of cuts in 2023. In our view, a 50bp hike is basically undisputed, but the focus will be on the tone of the meeting and the extent to which the ECB reiterates December’s hawkish message.
  • In the UK, the PMIs suggested there are headwinds for UK growth and a divergence is opening up between the UK and the euro area, where PMIs improved. The much-delayed PPI figures revealed that price pressures have peaked. We expect CPI inflation to follow the downward trajectory of PPI inflation, which is typically a leading indicator for CPI.

Central banks play chicken with financial markets


  • In the euro area, the focus will be on January surveys for firms (PMIs, Ifo, Insee, Istat) and consumer confidence surveys, where we expect continued improvement. Otherwise, there is also German retail sales and ECB M3 data, both of which we foresee weakening, and finally we have Spanish unemployment data and the first estimate of Spanish Q4 GDP growth, and believe Spain may have narrowly avoided entering a recession.
  • In the UK, we have a mix of hard and soft data. On the official side the ONS releases its long-awaited producer prices report for November and December, having been postponed due to errors in calculation (which have now been corrected). Budget deficit figures are also due.
  • On the survey side we have the PMIs (we see a small rise to take the composite index to within half a point of the 50-no change level) and both the CBI industrial trends survey (including the quarterly balances) and its retail sales counterpart.


Euro area stagflation: Here we go again


  • Spanish January inflation data surprised materially to the upside, with excess core inflation rising significantly, which is likely to be uncomfortable news for the ECB should this be repeated in euro area inflation data still to be published.
  • German GDP contracted, in line with our below-consensus forecast, suggesting Germany’s long-awaited consumer-driven recession has finally begun.
  • According to Bloomberg headlines, markets are now pricing in a 3.50% terminal rate, in line with our own view. We still expect a 50bp hike at the ECB’s February meeting, albeit we no longer expect the ECB to push back on near-term market pricing.

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