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The European Central Bank delivered the 75 bps hike expected, more than the 50 bps rise in July. The main refi rate, marginal lending facility rate and the deposit facility rate were lifted to 1.25%, 1.50% and 0.75% respectively. The ECB’s new and higher inflation forecasts justified the record rate increases. The significant markdown in the 2023 growth forecasts, the missing neutral rate target and the EUR’s depreciation adding to inflationary pressures were aligned to keep the ECB hiking over the next several meetings. EUR had a choppy session, rising to 1.0030 into the ECB meeting, plunging to 0.9930 during the press conference, only to end the session unchanged around parity. Despite the ECB converging with the Fed on fighting inflation, the focus should turn towards next week’s US CPI data and the third 75bps hike expected at the FOMC meeting a fortnight away. Overall, the ECB’s hawkish stance has a better chance of supporting the EUR on a nominal effective exchange rate basis instead of solely against the strong USD.
Fed Chair Jerome Powell’s speech lifted the US Treasury 2Y and 10Y yields above 3.50% and 3.30% respectively again. Speaking at a Cato Institute event, Powell was resolute about not repeating the Fed’s failure to curb inflation expectations, which he blamed for persistent inflation in the 1970s and 1980s. Powell had already indicated at Jackson Hole that another slower CPI inflation in August (8.1% YoY consensus vs 8.5% prior) next week would not hold the Fed back from acting strongly to fight inflation. Yesterday, Powell added the Fed would act “forthrightly” until the job is done. Apart from the 75bps hike expected at the FOMC, the Summary of Economic Projections will be scrutinized on how high the terminal rate will deviate from the 4% indicated by some officials. However, the Fed’s narrative is more explicit regarding a Volcker-like strategy to push inflation towards its 2% target with higher rates bolstering the greenback at the expense of growth.
JPY depreciated 0.3% to 144.11 per USD, unimpressed with the jawboning by Japanese government officials. JPY depreciated 20% YTD on Thursday, a pace not seen since 1979 and 1982. The Ministry of Finance, the Bank of Japan, and the Financial Services Agency met to signal its alarm at the JPY’s fall. Vice finance minister for international affairs Masato Kanda did not rule out any options to address the JPY’s relentless fall. Doubts remain that interventions, if they ever take place, would be able to halt the JPY’s descent, with the Bank of Japan bucking the expanding clique of central banks stepping up their game against inflation.
Quote of the day
“Tis better to have loved and lost than never to have loved at all.”
Alfred Lord Tennyson
9 September in history
The US Congress officially renamed the country the United States of America in 1776.
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