Recession fears return after a hawkish ECB – Daily Market Brief, December 16, 2022

After steep losses yesterday, the DAX and the CAC are heading for modest gains today. However, the upside could be capped as the ECB warned of much more rate hikes to come to tame inflation.

·         BoE was the more dovish of the major central banks pulling GBP/USD below 1.22

·         UK retail sales unexpectedly fell 0.4% MoM

·         Eurozone PMI data is expected to remain weak, below 50

European stocks closed sharply lower yesterday after the ECB raised concerns over the outlook for the European economy in 2023, raising recession fears. The DAX Closed 3.3% lower, and the euro Stoxx 50 dropped 3.5%.

The ECB raised interest rates by 50 basis points which was widely anticipated. However, the European Central Bank also upwardly revised its inflation forecasts while warning that more rate hikes were needed to rein in inflation. With inflation now expected to be 8.4% this year and 6.3% in 2023, it is set to be much stickier than initially expected.

The Federal Reserve painted a similar picture earlier in the week of stickier-than-expected inflation, which will take longer than initially expected to cool. Stocks on Wall Street also fell sharply as the hawkish ECB message added to the Fed gloom resulting in investors revaluing the earnings outlook for stocks amid a more challenging, higher-interest-rate-for-longer environment.

The BoE was the more dovish of the three central banks. While the central bank raised interest rates by 50 basis points to 3.5%, the vote was more dovish than expected as two policy members voted to keep interest rates unchanged. The pound dropped sharply versus both the euro and the US dollar as both central banks look set to outpace the Bank of England with rate hikes next year. GBP/USD fell 2% to a low of 1.2155, although the pair is rising today, pushing back above 1.22.

Heading toward the European open indices are pointing to a modest rise. The DAX is set to open 0.2% higher, the CAC is also set to rise 0.2% higher, and the FTSE is pointing to a 0.4% rise on the open.

Today attention is back on the economic calendar with a focus on UK retail sales and the PMIs from Europe, the UK, and the USA.

UK retail sales

UK retail sales unexpectedly fell in November, dropping 0.4% MoM after rising 0.9% in October. Expectations had been for a rise of 0.3%. The weaker-than-expected sales data come as UK consumer confidence lingers around a record low for the eighth month.

The GFK consumer sentiment survey showed that the measure of sentiment rose to -42, near the record low reading of -49 hit in September. The data reflects the impact that the cost of living crisis is having on UK households, with more consumers expecting a deterioration in their financial situation over the coming 12 months.

European PMIs

European flash PMI data for December is expected to show that business activity remained weak in the block. The manufacturing PMI is expected to hold steady at 47.1 while the services PMI is also expected to hold steady at 48.5. The composite PMI, which is considered a good gauge of business activity, is expected to remain depressed at 48. the level 50 separate expansion fat contraction. The weak data is expected to support the view that the eurozone economy contracted in the final quarter of the year and could limit gains in stocks and the euro.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

Sources: Bloomberg, CNBC, Reuters 

Original article provided by Trading Writers

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