Weekly Focus: ECB preparing for a lift-off in July

Euro area inflation once again exceeded expectations in May, sparking further speculation of faster ECB rate hikes. With core inflation rising to 3.8% y/y and seasonally adjusted m/m rate still around 0.5%, we now expect core inflation to peak only after the summer. Consequently, we have lifted our expectations for ECB rate hikes ahead of next Thursday’s meeting, and now look for 25bp hikes in every meeting from July to March (which would bring the deposit rate to 1.00%). Next week’s meeting will likely mark the formal end to ECB’s net asset purchases, and the focus will be on the possibility of 50bp rate hikes in the coming meetings, as markets are pricing in around 30% risk of such a hike in July. Read our full ECB Preview – Ready for lift-off, 2 June.

Today, we published Big Picture: A (mild) recession in western economies seems unavoidable, 3 June, with our latest economic forecasts. We now expect US economy to fall into a mild recession during H1 2023, with euro area following suit in H2 2023. The combination of weakening real purchasing power and tighter financial conditions will weigh on economic growth, even though pent-up demand, savings and the re-opening of economies will continue to support activity especially in the service sector in the near-term. Chinese growth will likely recover towards 2023 on the back of renewed stimulus, but with the latest lockdowns and no signs of easing the ‘zero-covid’ strategy for now, we have downgraded our growth forecast for 2022. As global demand outlook weakens towards 2023, we also expect the current inflation pressures to ease. That being said, we still expect euro area and US core inflation to remain above central banks’ target levels even in 2023, supporting the case for further rate hikes.

OPEC+ failed to stabilise rising oil prices after EU announced the embargo on Russian oil. OPEC+ agreed to hike production by 648 thousand barrels per day (bpd) in July and August, above the initial plan of 432 bpd, but it did not yet address Russia’s status within the group. While the larger production increases ease the supply situation in the near-term, they also mean less potential production capacity in the future, leaving the oil market vulnerable to new supply shocks. We expect prices to remain elevated in the coming months, and maintain our forecast for Brent at USD115/bbl towards Q3.

In China, Shanghai was able to end its two-month long lockdown this week. PMIs rebounded in May, and the recovering Chinese demand outlook is another factor supporting commodity prices. New stimulus was also announced this week, as policy banks are funding increasing number of infrastructure projects for the central government. Next week, focus remains on the Covid-situation, while the trade data released on Thursday will likely remain weak due to the disruptions caused by the pandemic.

In terms of economic data, next week’s highlight will be the US CPI on Friday. We expect the figures to continue illustrating strong and broad-based price pressures. Aside from the ECB, we expect the Reserve Bank of Australia (RBA) to continue its hiking cycle with another 25bp hike, but following recent 50bp hikes by the Fed, Bank of Canada and the RBNZ, risks are tilted towards a larger hike also in Australia.

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