The European Central Bank (ECB) raised its three policy rates by 50bp at yesterday’s monetary policy meeting, versus 25bp expected by analysts. But the ECB decision wasn’t a big surprise given that many investors were expecting to see the ECB come up with a bigger rate hike after the EUR/USD fell below parity last week.
Euro below parity against the US dollar makes things even more complicated for the ECB’s fight against inflation, and shifts the ECB’s rhetoric from Mario Draghi’s ‘whatever it takes’ to something like ‘whatever… we can’. Even Mario Draghi’s resignation, the dissolution of the Italian government, and the spike in the Italian yields didn’t change the ECB’s decision. We saw a determined ECB to tame inflation down to the 2% policy target.One of the major highlights of yesterday’s ECB decision was the anti-fragmentation tool, TPI, Transmission Protection Instrument. The name is fancy but what it could do to help the ECB is unsure for now, as the eligibility to the TPI sounds complicated - so complicated in fact that during her press conference yesterday, Christine Lagarde repeated "no, no it’s not that complicated" several times when she answered questions.
In simple terms... there is a set of fiscal and macro conditions that will determine whether a eurozone country is eligible for the TPI program. However, the neediest economies may not be eligible due to fiscal and macroeconomic restrictions.
The complicated TPI tool is perhaps why the euro and the European stocks gave back the early gains yesterday. The EUR/USD flirted with the 1.0280 mark but is back below the 1.02 this morning. Investors will likely give the ECB the benefit of doubt, but the euro will remain under meaningful negative pressure until we see the higher ECB rates translate into lower inflation.
With the ECB shifting to a rate-tightening phase, we have no more than Switzerland and Japan left in the negative rate territory. The Swiss National Bank (SNB) already surprised the market with a 50bp hike in its last meeting and pledged to do more, but the Bank of Japan (BoJ) maintained its policy unchanged yesterday and said it has "absolutely no plan" to raise the interest rates. Happily, the US dollar was softer yesterday, so the USD/JPY remained capped around the 138 level. Yet, the divergence between a more hawkish shift worldwide, and the insistently dovish BoJ should continue playing against the yen in the medium run.
Summer vacation for the US stocks?
The US dollar was softer yesterday, and the barrel of American crude slipped again below the $100 mark. The idea that lower energy prices will ease the inflationary pressures gave an additional boost to the US stocks, even though US jobless claims climbed to the highest levels since last November. If the jobless claims data is volatile, it’s also an early sign that a labour market shift could happen. Especially, when the data is combined with the latest news of job cuts.
After Apple (NASDAQ:AAPL) earlier this week, Microsoft (NASDAQ:MSFT) announced it will slow hiring in its security software unit and Azure cloud business in the foreseeable future. 7-Eleven (TYO:3382) also said it will cut around 880 jobs, and Snap (NYSE:SNAP) announced it will slow its rate of hiring "substantially", as well. Therefore, the next jobs figures may not be as enchanting as the latest ones. But for now, the US stocks extend recovery. The S&P 500 gained 1% for the third straight day, as Nasdaq jumped 1.36%. The stronger-than-expected earnings from Netflix (NASDAQ:NFLX) and Tesla (NASDAQ:TSLA) helped improve the market mood this week. Tesla, for example, jumped near 10% posterior to the earnings announcement.
Snap, however, hasn’t been that lucky, as its share price dived more than 26% in after-hours trading after the company missed estimates on a major slowdown in the ad industry due to economic jitters. Snap's results came as a warning for other Big Tech names that rely on ad revenue. Therefore, FAANG stocks, which recovered to an almost 2-month high yesterday, may not extend gains to the weekly close as the latest Snap results could reverse appetite for at least a couple of them, including Google (NASDAQ:GOOGL) and Meta (NASDAQ:META) before the closing bell.