New issues highlight value opportunities in fixed income
As central banks reconvene after the summer period, the September meetings offer a good chance to provide their updated outlooks. Whilst we expect the Fed to hold rates where they are and be more conciliatory in their rhetoric, we expect the Bank of England to hike by 25bp and point to the possibility of another hike. However, this Thursday the ECB meets and the decision there seems far less of a done deal.
Both headline and core Eurozone inflation are still at 5.3% YoY, and this number is even higher in the Eurozone’s largest country, Germany, at 6.4%. Meanwhile, wage growth also remains strong – pointing to the idea that another rate hike from the ECB may be necessary. On the other hand, the most recent PMI survey results in Europe saw weak numbers in both services and manufacturing – coming in at 47.9 and 43.5 respectively. A number below 50 here denotes that respondents believe the sector is in contraction and so is seen as a good lead indictor for potential recessions, and once again the German economy looked fragile with its important manufacturing sector’s PMI coming in at 39.1. The dilemma for ECB members was seen in this morning’s updated 2024 forecasts for the Eurozone which saw inflation tick up from 2.8% to 2.9% whilst their growth outlook fell from 1.6% to 1.3%.
The challenging data presented has led to a divergence in views from ECB members, and whilst it must be said that this is similar to the variances of views present among Fed and Bank of England members along this hiking cycle, the differences appear quite stark. ECB members Kazimir and Wunsch have said that the ECB should ‘take one more step’ in September and still has a ‘little bit more’ to do respectively. But then in the same time frame ECB member Centeno has warned of the risk of ‘doing too much’, and Schnabel has highlighted that growth is ‘weaker than foreseen’.
And so, with decision day looming it seems a consensus is not close. After nine meetings of consecutive hikes from the ECB we wonder whether they can pull off what the Fed did in their June meeting with a ‘skip’ or ‘very hawkish pause’ of their own and in doing so attempt to satisfy their hawkish members and the market that they are still aware of the above target inflation – though whether the skip ever gets completed with a hike in November is questionable considering the growth data beginning to roll over.
Whether a ‘skip’, ‘very hawkish pause’ or a conciliatory 25bp hike is actually pushed through is not likely to have a huge effect on the market in our view, with the exception of the short end of the euro curves. In reality the vast majority of the central bank’s job has been done, and whilst it will be interesting to hear their forecasts and their willingness to react to certain scenarios going forward, they, like us, will be watching the data to see how the impacts of the hiking cycle is effecting the real economy in order to determine their next steps in setting monetary policy.