Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 06/09/22

The market-implied expected path of euro area policy interest rates has shifted significantly higher ahead of the ECB meeting  
              
Key Takeaways

Global equity markets lost ground in the past week (MSCI ACWI: -3.3% wow), as interest rates were repriced higher due to increased expectations for a faster and more aggressive monetary policy tightening. The US Treasury 10-year yield ended the week up by 16 bps wow to 3.20%, and the 10-year Bund increased by 7 bps to 1.50%. 

Monetary policy remains in the spotlight (ECB meeting on September 8th). Strong CPI readings (9.1% yoy in August) as well as recent officials' commentary suggest that the possibility of a large hike is gaining ground. Financial markets now almost fully price-in a 75 bps hike in the upcoming ECB meeting, suggesting cumulative increases of 250 bps in the next 12 months versus 150 bps in mid-August.  

Taming inflation has been top priority, even with a potential hit to activity in the short term. The quarterly ECB staff projections are set to show an upward revision for CPI inflation in 2022 and 2023 towards 8% and 4.5%, from 6.8% and 3.5%, respectively, in June’s projections. 

At the same time, real GDP estimates for 2023 are expected to be revised significantly lower, in the range of +0.5% to +1% (from +2.1% in June’s projections), and from +2.8% in 2022, as negative risks (particularly regarding energy supply and prices) are materializing. 

In the event, wholesale electricity prices in Europe have exhibited high volatility, with the benchmark year-ahead contract reaching €985/Mwh in Germany on August 26th (2.9x the average in July and c. 12x the price one year ago) and €1130/Mwh in France (2.5x the average in July and c. 13x the price one year ago), before easing towards €509/Mwh and €590/Mwh respectively on September 2nd. Nevertheless, prices rose again on Monday to €570/Mwh and €625/Mwh respectively, following the surge in European natural gas prices (Dutch TTF: +15% on Monday). 

In light, inter alia, of these developments, the EU Commission will hold an extraordinary meeting of Energy ministers on September 9th to discuss interventions in the energy market, especially regarding the price setting mechanism. Reportedly, the possibility of a price cap on natural gas or/and its decoupling from electricity prices will be discussed. Recall that natural gas plays a disproportionate role in EU’s marginal pricing system for wholesale electricity. 

In that system, all electricity generators get the same price for the power they sell at a given moment. Electricity producers bid into the market and the bidding goes from the cheapest to the most expensive energy source. Once all demand is met, everybody obtains the price of the last producer (effectively the one with the most expensive energy source, which in the current juncture is natural gas) from which electricity was bought. 


The German government on Sunday announced a €65 bn relief package, bringing the total fiscal support since the start of the Ukraine war to €95 bn (3% of 2021 GDP). The new package includes, inter alia, one-off payments to pensioners and students, increased housing and child allowances, lower social security contributions, expanded KfW programs for companies and subsidized public transportation tickets. 

 
Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 06/09/22
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