Can the ECB Hike Much As Economy Heads Into Recession?

The FED has turned really hawkish, as they keep increasing the pace of rate hikes, having delivered a 75 bps (basis points) hike in the last meeting. More hikes are expected in the months ahead as central banks try to tackle inflation without much success. The European Central Bank is also planning to start raising interest rates as soon as July, which has given some support to the Euro recently.

They are expected to deliver their first rate hike in the next meeting, although what’s important is the pace they will keep after this hike. If they keep a soft stance after this, then the Euro will turn bearish again, and the economic data supports this view.

EUR/USD H4 Chart – MAs Turning Into Resistance Again

German June Manufacturing and Services Report

• June flash manufacturing PMI 52.0 points vs 54.0 expected
• May manufacturing was 56.1 points
• Services PMI 52.4 points vs 54.5 expected
• May services were 55.0 points
• Composite PMI 51.3 points vs 53.1 expected
• Prior composite was 53.7 points

S&P Global notes that:

“June’s flash PMI data show that Germany’s economy has lost virtually all the momentum gained from the easing of virus related restrictions, with growth in the service sector cooling sharply for the second month in a row in June.

“But perhaps the biggest cause for concern is a broadbased decline in demand, with a deepening downturn in manufacturing new orders coinciding with a first fall in service sector new business for six months, as rising prices and elevated levels of uncertainty take a toll. Activity is still being supported to some extent by workloads built up earlier in the year, however.

“Price pressures remain historically elevated. However, there are signs that businesses might be finding it increasingly difficult to pass on higher costs to customers, with average prices charged for goods and services rising at the slowest rate for three months despite a quicker increase in input costs that the survey in part linked to rising wage pressures.

“Thanks to a particularly grim outlook for the manufacturing sector, business confidence towards future activity is now at its lowest since the first wave of the pandemic two years ago, and we’re seeing this translate into a broad-based slowdown in job creation as companies start to reassess their staffing needs going forward.”

Euro area growth slows to a 16-month low as demand conditions stall as the economy feels the pinch of the inflation surge. The details reveal that both the stagnation of demand and worsening outlook were widely blamed on the rising cost of living, tighter financial conditions and concerns over energy and supply chains. S&P Global notes that:

“Eurozone economic growth is showing signs of faltering as the tailwind of pent-up demand from the pandemic is already fading, having been offset by the cost of living shock and slumping business and consumer confidence.

“Excluding pandemic lockdown months, June’s slowdown was the most abrupt recorded by the survey since the height of the global financial crisis in November 2008.

“The slowdown means the latest data signal a rate of GDP growth of just 0.2% at the end of the second quarter, down sharply from 0.6% at the end of the first quarter, with worse likely to come in the second half of the year. Inflows of new business have stalled, led by a slump in demand for goods and reduced demand for services from cash-strapped consumers in particular.

“At the same time, business confidence has fallen sharply to a level rarely seen prior to the pandemic since the region’s economic contraction during the 2012, hinting at an imminent downturn unless demand revives.

“Rising levels of unsold stocks meanwhile mean the manufacturing sector will likely seek to reduce capacity in coming months which, alongside the deteriorating picture in the service sector and drop in confidence, will inevitably hit jobs growth.

“Persistent inflationary pressures add to the woes. The survey’s price gauges, which correctly anticipated the recent surge in inflation, remain elevated at levels not seen in the history of the eurozone prior to the pandemic, with a worrying increase in costs growth in the service sector. However, the recent cooling of demand is already showing signs of calming goods prices, bringing a tentative hint of a peaking of inflation in the near future.”

June Flash Services and Manufacturing Reports

• June flash services PMI 52.8 points vs 55.5 expected
• May services were 56.1 points
• Manufacturing PMI 52.0 points vs 53.9 expected
• May manufacturing was 54.6 points
• Composite PMI 51.9 points vs 54.0 expected
• Prior composite was 54.8 points

Euro area growth slows to a 16-month low as demand conditions stall as the economy feels the pinch of the inflation surge. The details reveal that both the stagnation of demand and worsening outlook were widely blamed on the rising cost of living, tighter financial conditions and concerns over energy and supply chains. S&P Global notes that:

“Eurozone economic growth is showing signs of faltering as the tailwind of pent-up demand from the pandemic is already fading, having been offset by the cost of living shock and slumping business and consumer confidence.

EUR/USD Live Chart