Oct 2 / Alef Dias

Macroeconomics Weekly Report - 2023 10 02

  Back to main blog page
"After its most recent rate hike, the European Central Bank hinted that it might be the last one for this monetary tightening cycle. The substantial drop in inflation during September has likely bolstered the Governing Council's belief that further tightening is unnecessary."

Lower inflation backs ECB last hike hint

  • Following its latest interest rate increase, the European Central Bank suggested that it could potentially be the final move in this cycle of monetary tightening. The significant decline in inflation in September has probably strengthened the Governing Council's conviction that additional tightening measures are not required.
  • Concerning business surveys indicating a notable decline in economic activity, and credit extension at levels reminiscent of the euro crisis era contribute to this view.
  • Now, there isn’t many fundamentals pointing towards a “gap-closing” between US and EU yields. In the last ECB meeting, the changes in bonds markets show that for the medium and long term, traders received the decision and Lagarde’s speech as dovish. In summary, there isn’t much room for a strengthening of the Euro in the coming months.


After its most recent rate hike, the European Central Bank hinted that it might be the last one for this monetary tightening cycle. The substantial drop in inflation during September has likely bolstered the Governing Council's belief that further tightening is unnecessary. Credit contraction and economic activity data also point at this direction, and with this scenario in mind, this reports aims at bringing an updated view for the Euro.

Inflation cooled faster than market expected

Headline inflation in the Euro-area fell to 4.3% from 5.2% in August, below consensus expectations of 4.5%. Core inflation declined to 4.5% from 5.3%, falling short of consensus’ anticipated 4.8%. As anticipated, energy contributions reverted to a more negative trend in September. It is likely that this shift was predominantly influenced by housing energy costs, as the 4.3% surge observed in September 2022 is unlikely to have been replicated this year.

Image 1: Headline and Core inflation - EU

Source: Source: Refinitiv

Image 2: Policy Interest Rates – ECB and Fed

Source: Refinitiv

Conversely, road fuel inflation is expected to have risen due to the uptick in pump prices following the upward trajectory of global oil prices. Food inflation maintained its downward trajectory in September, as the robust monthly price increases observed throughout 2022 continued to fade from the year-over-year comparisons.

Core categories also slowed faster than expected. Non-energy industrial goods inflation fell to 4.2% from 4.7% and services inflation to 4.7% from 5.5%. As a result, the easing in underlying price pressures, which has been under way since early 2023, is becoming more visible in the core reading. The fact that the decline in core inflation in September was larger than expected suggests the easing of those underlying pressures is continuing at a hefty pace.

Image 3: EU Credit Impulse (%, YoY)

Source: Bloomberg

Credit Impulse Points to Slump in Demand

The latest European Central Bank's monthly credit data reveals that the drag on spending caused by reduced credit provision is now considerably more pronounced than it was during the depths of the Euro crisis. As a result, the risk of economic contraction in the latter half of the year is on the rise.

The credit impulse for households and non-financial corporations within the Eurozone declined to -5.2% of GDP in August, down from -3.7% in July. This shift lowered the three-month average to -3.9% from -2.9%. M3 money supply growth fell below the consensus forecast, declining to -1.3% year over year from the previous month's -0.4%. These figures contrast with the median estimate of -1.0%.

Image 4: EU PMIs

Source: Refinitiv

PMI’s Rise Is Unlikely to Alter ECB Rate Outlook

The unexpected improvement in the euro-area’s PMI survey is small and activity remains weak. The headline reading rose to 47.1 in September from 46.7 in August. With an average of 47.5 for July to September, compared to 52.3 for April to June, it indicates a significant slowdown in GDP growth during the third quarter. The three-month average aligns with a potential 0.3% contraction in the economy for Q3.

In the euro area, manufacturing continues to suffer much more than the services sector. The reading for the former fell to 43.4 from 43.5 and that for the latter climbed to 48.4 from 47.9.

Source: Bloomberg

In Summary

Analysts are already beginning to question China's conditions for reaching the official 5% growth target for the year 2023. The central problem for the country today is how to rescue consumer confidence and create conditions for its real estate market to recover. Due to the importance of the segment for the country's economy, its poor performance ends up affecting other sectors such as industry, which slowed down in July.

While the rate cuts are an important signal to the market, China needs more stimulus to boost its slowing economy. Some events are raising more concerns about the risks facing the country. The defaults announced by major real estate companies are an example, and the Country Garden case, despite being recent, may not have been the last.

The continuity of the Chinese slowdown contributed to a more challenging macro scenario for commodities and emerging currencies, given that the country is the main importer of several products and one of the main trading partners of several emerging countries.

Image 1: 2-Y yield spread (EU vs US)

Source:  Refinitiv

Image 2: ECB’s decision impact on policy rates expectations (b.p.)

Source: Bloomberg

Weekly Report — Macro

Written by Alef Dias
Reviewed by Victor Arduin


This document has been prepared by hEDGEpoint Global Markets LLC and its affiliates ("HPGM") exclusively for informational and instructional purposes, without the purpose of creating obligations or commitments with third parties, and is not intended to promote an offer, or solicitation of an offer, to sell or buy any securities or investment products. HPGM and its associates expressly disclaim any use of the information contained herein that may result in direct or indirect damage of any kind. If you have any questions that are not resolved in the first instance of contact with the client (client.services@hedgepointglobal.com), please contact our internal ombudsman channel (ouvidoria@hedgepointglobal.com) or 0800-878-8408 (for clients in Brazil only).

To access this report, you need to be a subscriber.