Intesa Sanpaolo: The ECB has released the flexibility on PEPP reinvestments to contain the divergence of financial conditions among euro area countries.
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Weekly Economic Monitor – 17 June 2022
Intesa Sanpaolo – Research Department
In addition, it envisaged the implementation of a structural solution: probably an SMP-type mechanism, with access conditional on the fulfilment of minimum conditions and sterilisation of liquidity effects. This development should facilitate the normalisation of official rates in the coming months.
The FOMC comes to terms with reality: all-out rate hikes to tame inflation . The June meeting marked a new turn in monetary policy, with a 75pb increase and a signal that hikes will remain “expeditious” until there is „compelling evidence that inflation is moving down”. The Fed recognizes the need for restrictive monetary policy to bring inflation back toward 2% and expects growth to slow and unemployment to rise significantly. Since inflation is also influenced by factors outside the central bank’s control, an overshooting on rates and a recession starting in the 2023H2 are events with significant probability, close to 40%, in our view.
The week’s market movers
In the euro area , the round of June confidence surveys should report a contained improvement in business sentiment in Germany and France; in Italy, Istat surveys should report mixed indications. PMIs, while staying at expansionary levels, should confirm the divergence under way between manufacturing and services. European consumer confidence is also expected to improve slightly, while staying well below the long-term average. The calendar of releases also includes the final estimates of GDP growth in Spain and in the Netherlands, and the April reading of construction sector output.
There are few major data releases this week in the United States . The preliminary June Markit manufacturing and service PMI indices are expected to confirm continued expansion, but at a slower rate, amid persistent labor shortages and fears of weaker economic conditions. Consumer sentiment in June is expected to stabilize after the slump seen with the preliminary index reading, confirming fears about rising inflation and the markets’ correction. New and existing home sales in May are expected to continue on the downward trend seen since the beginning of the year, with less large changes than in recent months.
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