Latest ECB Minutes show significant support for +50 b.p. hike to 2.5% (deposit rate)

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Yields 4: European markets open higher (Eurostoxx futures +0.5%, S&P futures -0.1%) after a session of less to more on Wall Street, and on a day in which the most relevant will be the ISM services report in the US, which could fall in February (54.5e and 55.2 previously), and where the main focus will be on its price component, with upside risk after the strong rebound seen in the manufacturing case. We will also wait for the employment component after yesterday’s better-than-expected weekly unemployment report which shows a very solid labour market.

In China, the February Caixin PMIs for services 55 (vs 54.5e and 52.9 previously) and composite 54.2 (vs 51.1 previously), which together with those previously released during the week (official and Caixin manufacturing) show an economy that is recovering after the end of the Covid zero policy. Japan’s final PMIs for February have also been released, improving the preliminary ones: services 54 (vs 53.6 preliminary and 52.3 previous) and composite 51.1 (vs 50.7 preliminary and previous), to which the Tokyo CPI has been added, which moderated in February to 3.4% (vs 3.3% and 4.4% previous) after the entry into force of energy subsidies. We will also see the final PMIs for February, services and composite, in the US, which will remain in neutral territory around 50, and slightly better in the Eurozone (52-53), although consistent with low growth.

Yesterday’s worse-than-expected CPI in the Eurozone, 8.5% headline (vs 8.3%e and 8.6% previously), which is also not surprising after higher-than-expected inflation in France, Spain, and Germany. More worrying, however, is the rebound in the core rate (which excludes energy, food, alcohol, and tobacco) to a new all-time high of 5.6% and the risk of second-round effects. Today Eurozone producer prices could moderate in January to +17.8% vs 24.6% previously.

The ECB Minutes of the February 2nd meeting yesterday showed significant support for a +50bp hike to 2.5% (deposit rate), +300bp since hikes started in July 2022, and its intention to continue raising rates, although without any visibility on the pace of hikes from March onwards. We expect +50bp in March and the probability of +50bp in May is increasing, although at the March 16th meeting the macro picture (GDP, inflation) will be reviewed, which could offer more clarity regarding the pace and level of impact of European rates, which we recall the market has raised to levels of 4%.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.