Euro Spikes; ECB at 50bps hike!

The ECB expects further rate hikes in upcoming meetings. The ECB finally joined the rate hike club and said the larger than initially expected rate hike was “based on the Governing Council’s updated assessment of inflation risks and the re-inforced support provided by the TPI for the effective transmission of monetary policy”. The initial statement flagged that additional rate hikes at the upcoming meetings are likely, with the decision to be taken on a meeting by meeting basis. Front loading the tightening cycle in the current situation clearly is a good idea, and will please the hawks at the ECB, while the doves will be pleased that they got the new TPI tool off the ground. The new program is potentially unlimited and can be activated to “counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area”. The scale of TPI purchases depends “on the severity of the risks facing policy transmission” and “purchases are not restricted ex ante”. So while regular asset purchases have ended, there is now a new potentially unlimited tool to buy troubled debt. The details will show whether this means the “no bailout” clause is finally a thing of the past. Eurozone yields are shooting higher, with the German 10-year at 1.355% now, and the Italian at 3.692%. EURUSD is at 1.0253 now.

The ECB lifted rates by 50 bp – a larger than expected move – although at the same time, the bank unveiled a new tool – called TPI – to address “unwarranted, disorderly market dynamics”. The hawks got their way on the rate hike then and the 50 bp move ends the negative interest rate environment as it lifts the deposit rate to 0.00%, and the main refinancing rate to 0.50%. The EUR has moved higher on the announcement, at least for now, as we suspect that the final reaction will depend on the details of the TPI.

In the US, initial jobless claims increased 7k to 251k in the week ended July 16 after rising 8k to 244k in the July 9 week. This is the highest since November. In fact, initial claims generally have been trending higher since falling to a 53-year low of 166k in March and this trend is adding to worries over the economy. And this week’s data will get extra scrutiny as it covers the BLS employment survey week. The 4-week moving average moved up to 240.5k after edging up to 236k (was 235.75k). Initial jobless claims not seasonally adjusted rose 7.9k to 249k from 241.1k (was 241.3k). Continuing claims jumped 51k to 1,384k for the July 9 week after dropping -39k to 1,333k (was 1,331k) previously. The insured unemployment rate edged back up to 1.0% after dipping back to the prior all-time low of 0.9% in the July 2 week.

The 7k initial claims rise to an 8-month high of 251k in the BLS survey week from a prior high of 244k leaves a significant 4-month climb from the 53-year low of 166k in March. A 51k pop in continuing claims to a 3-month high of 1,384k in the second week of July also leaves a big 7-week climb from a 52-year low of 1,306k in mid-May. Initial claims are averaging 246k in July, versus prior averages of 232k in June, 209k in May, and 187k in April. The 251k July BLS survey week reading sits well above prior survey week readings of 233k in June, 218k in May, and 185k in April. For continuing claims, we expect a 56k rise between the June and July BLS survey weeks, leaving the first increase since May of 2020, after declines of -19k in June, -60k in May, -139k in April, -91k in March, and -154k in February. The 4-month uptrend in initial claims and the 7-week uptrend for continuing claims suggest downside risk for our 260k July nonfarm payroll estimate, and much greater downside risk into Q4.

About the author

Andria Pichidi

Having completed her five-year-long studies in the UK, Andria Pichidi has been awarded a BSc in Mathematics and Physics from the University of Bath and a MSc degree in Mathematics, while she holds a postgraduate diploma (PGdip) in Actuarial Science from the University of Leicester.