Global Economy & Markets, Weekly Roundup 12/09/23

Investors’ attention is turning to Thursday’s ECB meeting
Key Takeaways
The ECB will convene this week. Whether monetary policy interest rates will remain unchanged following nine consecutive interest rate hikes of 425 basis points cumulatively, or another increase of +25 basis points will take place, remains a close call. In our view, the ECB will stop its tightening cycle at a terminal rate of 4.0% (current DFR: 3.75%).

Arguing against the necessity of further interest rate hikes and the risk of tipping the euro area economy into recession, real GDP growth has been roughly stagnant in the past three quarters, leading the annual growth to a weak +0.5% in Q2:2023. 

In addition, leading business indicators (PMI) suggest a subdued momentum in the current quarter. Specifically, the composite PMI index has averaged 47.7 in July-August, below the expansion/contraction threshold of 50.0, from 52.3 in Q2:2023 and 52.0 in Q1:2023.

On the other hand, persistent inflation pressures call for vigilance in the fight against inflation. Note that the euro area headline CPI has decelerated to +5.3% yoy from a peak of +10.6% yoy in October 2022 mainly driven by negative energy (dis)inflation and declining food inflation, albeit upward pressures on the costs of energy and food are re-emerging. Underlying inflation remains high overall, with the annual growth rate of core CPI at +5.3% and the three-month on three-month annualized rate of change at circa +4.0%. 

Regarding the inflation forecasting horizon up to 2025, ECB staff’s technical assumptions in June 2023 called for (average) Brent oil prices of €74/barrel, natural gas prices of €47/Mwh, EUR/USD of $1.09 and an average 3-month Euribor of +3.2%. Based on future and FRA average prices in September, so far, mean expected values for 2023-2025 are €82/barrel (+11% higher compared with June), €49/Mwh (+4%), $1.095 (+1%) and +3.4% (+20 basis points). All told, the above-mentioned offsetting factors suggest that core CPI ECB projections for end-2025 will remain slightly above 2%. 

DBRS Morningstar upgraded the Hellenic Republic’s issuer rating from BB (high) to BBB (low), with a stable outlook. The revised rating represents a re-introduction of Greece to Investment Grade status, the first from one of the four major rating agencies (the others being S&P Global, Moody’s and Fitch) that the ECB considers in terms of collateral and large-scale asset purchase policies.

Greek government bonds had a muted reaction, as the rating upgrade was generally anticipated, with the GGB/Bund spread having narrowed by -118 bps in the past twelve months. The 10-Year GGB yield was 3.97% on Monday, little changed (+1 bp) from Thursday’s close of business (-2 bps in spread terms over Bund to 133 bps).

Attention now turns to the next rating from S&P Global on October 20th. A move to Investment Grade status from at least one of S&P Global, Fitch of Moody’s (Moody’s holds its next rating on September 15th but currently stands three notches below IG) could pave the way for an inclusion of Greek government bonds to tradeable active and passive bond indices, broadening the pool of potential investors.
Global Economy & Markets, Weekly Roundup 12/09/23