Morning Minutes

ECB Jumps on the Hawkish Bandwagon, Signals Stagflation




The European Central Bank has made a number of announcements this morning with the potential to impact trading in stocks and bonds. Long a member of the dovish camp (asset purchases and negative interest rates), the ECB has turned to join the hawkish camp, announcing that 1) it intends to end asset purchases by the end of this month,  2) it intends to raise its main interest rates by 0.25% in July, raising its benchmark rate up from zero for the first time since early 2016, 3) it may raise interest rates by an even larger amount in September if necessary, and 4) rate hikes may continue for some time at a gradual and sustained pace.

The German 10-year yield has jumped to 1.45% and the US 10-year treasury note yield has broken through 3.00% and is trading near 3.05%, putting pressure on bonds. The Euro is up 0.5% against the US Dollar on this news. Declines in European indices have accelerated since the announcement with the Dax now down 1.2%, the CAC down 1.0% and the FTSE down 0.8%. US Index futures are flat to down marginally.

Forecasts from the ECB provide more evidence to suggest that stagflation (high inflation and low economic growth) continues to rear its ugly head. With Eurozone inflation having reached 8.1% over year in May, the central bank raised its inflation forecast for this year to 6.8% from 5.1% and cut its GDP growth forecast for this year to 2.8% from 3.7%.   

China announced better than expected export (16.9% vs street 8.0%), and import (4.1% vs street 2.0%), growth figures for May but reports of selected new lockdowns appear to have rattled commodity traders this morning. WTI crude oil is steady near $122.00/bbl, but copper is down 1.3% and platinum is down 2.7%.

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Colin Cieszynski, Chief Market Strategist

Colin Cieszynski, CFA, CMT
Chief Market Strategist
+1 (647) 282-4428

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