ECB Appears Hawkish, U.S. Retail Sales Disappoint
2022.12.16 06:55
- ECB signals that more double hikes are on the way
- US retail sales slide by more than expected
- Dollar ends Thursday higher on haven flows
- Wall Street slides on recession fears
ECB slows hikes to 50bps but pledges more to come
The US dollar finished Thursday higher against all its major peers, even against the euro, which at some point received support from a hawkish ECB. That said, a lower euro/dollar does not give the full picture of how the euro performed overall. The common currency was still able to outpace all the other major currencies. It just wasn’t as strong as the greenback.
Yesterday, the ECB raised interest rates by 50bps, as generally expected, but at the press conference following the decision, President Lagarde appeared surprisingly hawkish. “Anybody who thinks this is a pivot for the ECB is wrong,” she said, adding that interest rates are likely to continue being raised at a 50bps pace for a period of time. That Bank also laid out a plan to start unwinding its bond holdings from March, another step towards tighter policy.
A hawkish ECB came just a day after Fed officials also appeared in their hawkish suits at their last gathering for the year. However, the difference is that investors seemed to have taken the ECB more seriously than the Fed. Even after US policymakers signaled that interest rates are likely to continue to rise above 5%, and even after Powell tried to push back against expectations of a pivot, the market is pricing in a terminal rate of around 4.88% and still 50 basis points worth of cuts by the end of 2023. On the other hand, just after the ECB decision, they moved their forecast of where they expect the ECB’s deposit rate to peak, to over 3% from 2.75% ahead of the meeting, while they see the rate ending 2023 only 10bps lower.
Dollar up on flight to safety
The dollar still finished the day higher, but that was more likely the result of safe haven flows in the aftermath of the weak US retail sales, rather than expectations of a more aggressive Fed. It fell as soon as retail sales for November contracted by more than expected but reclaimed the lost ground and traded even higher in the next couple of hours. Today, it is trading mixed.
The US dollar could continue to attract safe haven flows as recession worries intensify. However, with market participants still believing in a Fed pivot next year, other safe havens like the yen and gold may slowly start becoming more attractive. Therefore, even if it enjoys some more safe haven flows periodically in the next months, it is unlikely to revisit its September highs. And with market participants seeing the ECB as being more hawkish than the Fed henceforth, euro/dollar may be poised to extend its latest recovery. The last line of defense for the bears may be the 1.0800 zone, where a break could encourage more participants to start talking about a reversal.
Equites slide, PMIs awaited
Most equities traded south yesterday, with the European indices feeling the heat of a hawkish ECB and Wall Street perhaps hurt by the weaker-than-expected US retail sales. It seems that this time around, bad news was actually bad news for stocks as well, with investors selling even when data enhances their hypothesis of a Fed pivot at some point next year. This adds credence to the view that the inverse correlation could break at some point, as a deeply wounded economy is far from positive for firms’ earnings outlooks.
Whether bad news is not good for stocks anymore – and vice versa – could be confirmed or dismissed by the flash estimates of the S&P Global PMIs for December, due out later today. All three of the US indices are expected to have stayed in contractionary territory, but with the services index rising and the manufacturing one staying unchanged. The composite index is expected to have increased to 47.0 from 46.4. If this eases yesterday’s nervousness and anxiety, equities may rebound somewhat. However, with the effect of the Fed’s tightening crusade not fully felt yet, the bigger picture would likely remain gloomy.
SNB and BoE also hike by 50bps, oil slides
The SNB and the BoE also delivered half-point increments yesterday, with the former offering no firm signals for further increases, but with the latter saying that more hikes are on the way. Having said that though, among the 9 members of the MPC, 6 supported the decision, one favored a bolder move, while two voted for keeping interest rates untouched. That’s maybe why the pound was among yesterday’s main losers.
The wave of central bank hikes and the increasing recession fears may have been the reasons why oil prices came under pressure again. Despite the recovery earlier this week, investors remain concerned about energy demand, especially from China. Yes, news about easing COVID restrictions in the world’s second largest economy and top oil importer is nothing but encouraging, but it may take time before the engines of the economy restart. Indeed, economic data continues to come on the weak side, with industrial production slowing by more than expected in November and retail sales for the month tumbling the most in six months.
