0e3d4e53dc39047191f43808b87cca419b5e48e28ad3cbc686db7d301999fa57;;[{"layout":"linklist","uid":28747,"publicationDate":"01 Dec 11:00","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184349.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJPMscoAUz340rTaIW0R-VPg=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Chart of the Week - ECB QT requires private investors to step up","product":"Chart of the Week","synopsis":"<p><ul class=\"ucrBullets\"><li>There are only two weeks until the next ECB meeting, where ECB President Christine Lagarde is likely to announce the 'principles' of the quantitative tightening (QT). We expect ECB QT to start in 2Q23 and to involve only the APP. On the other hand, bond redemptions within the PEPP will be fully reinvested, in our view. We think that the portfolio runoff will be gradual, with the central bank reducing its APP holdings by 5% per year (EUR 15bn per month). Next year, the ECB will not reinvest roughly EUR 130bn of maturing bonds, EUR 90bn of which will be government securities within the PSPP. This amount is not particularly high compared to the total size of the PSPP. Nevertheless, while the ECB has helped absorb net supply of government securities up to this year, in 2023, QT will increase the amount of bonds that will have to be bought by private investors. <\/li><li>QT will come in a year characterized by still elevated net supply, as eurozone countries will continue to face high net borrowing requirements. Our Chart of the Week compares the net supply of government securities (including both T-bills and medium\/long-term bonds) and the government securities purchased by the ECB under both the PSPP and the PEPP. Red dots indicate the net supply that must be absorbed by private investors, i.e. the expected difference between net supply of govies and purchases by the ECB. While we expect net supply of govies to be in line with this year\u00b4s, the launch of QT is likely to increase net issuance to markets to EUR 500bn, the highest amount since 2010.<\/li><li>Hence, private investors, who, unlike the ECB, are price-sensitive, will have to step up their bond purchases. This could cause some selling pressure on EGBs, especially at the beginning of the year and following their recent rally. However, we only see a limited increase in yields as we expect the APP portfolio runoff to be gradual. Moreover, we do not expect a significant widening of sovereign spreads, given that the ECB has effective tools to fight fragmentation.<\/p><\/li><\/ul><p class=\"ucrIndent\"><p>Francesco Maria Di Bella<\/p><\/p><p class=\"ucrIndent\"><p> FI Strategist<\/p><\/p><p class=\"ucrIndent\"><p> +39 02 8862-0850<\/p><\/p><p class=\"ucrIndent\"><p> francescomaria.dibella@unicredit.eu<\/p><\/p><p class=\"ucrIndent\"><p> UniCredit Bank AG<\/p><\/p><p class=\"ucrIndent\"><p> UniCredit Research<\/p><\/p><p class=\"ucrIndent\"><strong><p> Piazza Gae Aulenti, 4<\/strong> - Tower CI-20154 Milan<\/p><\/p>","hash":"0e3d4e53dc39047191f43808b87cca419b5e48e28ad3cbc686db7d301999fa57","available":"0","settings":{"layout":"linklist","size":"default","showanalysts":"0","showcompanies":"0","showcountries":"0","showcurrencies":"0","synopsislength":"-1","synopsisexpand":"0","nodate":"0","nolinktitle":"0","notitle":"0","dateformat":"d M G:i","noproduct":"0","noflags":"0","shownav":"0","oldestedition":"","limit":"12"}},{"layout":"linklist","uid":28741,"publicationDate":"30 Nov 13:39","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184343.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJPMscoAUz340_954RbVL_VQ=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Data Comment - Italian inflation stabilizes at high level driven by increasing energy prices","product":"Data Comment","synopsis":"<p><ul class=\"ucrBullets\"><li>Italy\u00b4s consumer inflation stabilized at 11.8% yoy in November. This compares with our and the consensus expectation for an 11.3% reading, although we flagged some upside risks to our call from a rise in gas prices that emerged at the end of the month. Energy prices rose by 67% yoy in November, showing only a modest deceleration from 71.1% yoy in the previous month. These are unprecedented increases due to energy-tariff increases in both the protected and free energy markets. <\/li><li>Regarding the price of energy goods on the protected market, the key driver was recent evolution in the gas price. Starting in October, gas price changes that enter the CPI are estimated by the Italian National Institute of Statistics (Istat) on a monthly basis, rather than on a quarterly basis, as it still is for electricity prices. In its preliminary estimate today, Istat set an increase of 9.8% mom for the price of gas on the regulated market for November, which was higher than we had expected. The Italian Regulatory Authority (ARERA) will officially announce the gas price change for November at the beginning of December, and any difference to Istat\u00b4s preliminary estimate will be included in the final CPI estimate, which is to be published on 16 December, leaving open the possibility that headline inflation figures could be revised.<\/li><li>On the free energy market, electricity and gas prices were up again (on a monthly basis) in November, although modestly. This was the second unexpected outcome compared to our forecast ' taking into account that a significant increase to the order of 60% was already frontloaded by energy providers in October, as opposed to the more-gradual repricing usually observed in the past. <\/li><li>Food-price pressure remained elevated, in line with our expectation. While it is proving difficult to anticipate the exact timing, we continue to see a deceleration in food-price inflation over the course of next year ' based on our expectation that food commodity prices will not record further spikes while easing energy costs should reduce pressure on production costs. Core inflation rose to 5.7% in November, from 5.3% in the previous month. We observed a monthly increase in prices for non-energy and non-food goods (+0.3% mom) and a marginal decline in services prices (-0.1% mom).<\/li><li>An indication that disinflation could start soon comes from Istat\u00b4s manufacturing survey, showing ongoing easing in pipeline price pressure. Despite this still-high volatility at the turn of the year, our inflation outlook is consistent with a deceleration in energy-price inflation, which could drive down headline inflation quickly to close to 2.5% by end-2023. In annual terms, we expect inflation to be slightly above 8% in 2022 and to decline to about 6% in 2023.Chart 1 shows that CPI inflation broadly stabilized at 11.8% in November. Increasing energy prices contributed around 55% to the inflation reading, mostly due to high gas and electricity tariffs, while food-price inflation contributed more than 20%.<\/p><\/li><\/ul>"},{"layout":"linklist","uid":28736,"publicationDate":"29 Nov 15:57","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184338.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJPMscoAUz340b8epFz656EE=&T=1&T=1","protectedFileLinkDe":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184342.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJPMscoAUz340thpaNYUFy9s=&T=1&T=1","protectedFileLinkIt":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184353.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJPMscoAUz340wFsfk_pQcpA=&T=1&T=1"},"title":"Oil Update - The consequences of placing a price cap on Russian oil","product":"Oil Update","synopsis":"<ul class=\"ucrBullets\"><li> European diplomats are negotiating a price cap on Russian oil once an EU ban takes effect, but there is substantial disagreement regarding a price target. <\/li><li> The greatest challenge is to identify a price for Urals low enough to compromise Russia\u00b4s public finances and war efforts but high enough to incentivize Moscow to keep pumping.<\/li><li> Russia has several options to circumvent such a cap, and OPEC+ might feel compelled to adopt a more aggressive stance (cutting or threatening to cut production even further) to dissuade the West from regulating the price of other crude benchmarks in the future. Brent prices have been on a rollercoaster throughout 2022. They started the year around USD 80\/bbl before jumping to USD 127\/bbl in March on the back of the Russia-Ukraine conflict, and since September, they have fluctuated within a wide trading range of USD 100\/bbl and USD 80\/bbl. In October, OPEC+ managed to put a floor under Brent prices at USD 90\/bbl by announcing new output cuts to the tune of 2mb\/d, but this floor was broken recently. Now, oil prices are roughly back to where they were at the beginning of the year. Three factors are weighing on oil prices. First, new COVID-19-related restrictions in China in response to surging case numbers (with all their repercussions on mobility, economic activity and social tensions) are darkening the demand outlook for oil. Second, rumors that Saudi Arabia might push OPEC+ to reverse production and add 500,000 b\/d have created expectations of abundant supply. Third, the attempt by the G-7 to set a price cap on Urals (the Russian benchmark) is putting downward price pressure on Brent as well. While the COVID-19 outlook in China remains the greatest unknown factor, in what follows, we discuss why placing a price cap on Russian oil, if successfully negotiated, might push OPEC+ to adopt a more-aggressive stance, pushing oil prices up. The challenge of the price capLast spring, the G-7 endorsed the introduction of a price cap on Russian oil. The measure was meant to keep Russian oil moving at a low price instead of removing it from the market, as an EU ban on Russian crude and on insurance on tankers would have implied (95% of the world\u00b4s tanker liability cover is arranged through a London-based insurance organization called the International Group of Protection and Indemnity Clubs, which heeds European law). On paper, the mechanism looks straightforward. Once a price cap is set, buyers of Russian oil would be offered a waiver from the ban on European shipping insurance. Thanks to this exemption, countries like India or China, which have abstained from sanctioning Russia, would be allowed to buy from Moscow not just the barrels that they usually buy but also those that no longer go to Europe or North America, thus freeing Middle Eastern oil producers to redirect part of their Asian exports towards Western countries. In turn, the global oil market would be balanced despite sanctions. Prices would decline, while Moscow would take in fewer oil revenues.As we highlighted in our July Oil Update, the challenge is to identify a price for Urals low enough to compromise Russia\u00b4s public finances and war efforts but high enough to incentivize Moscow to keep pumping. Chart 1 shows that, as a result of Western sanctions, Urals, which is trading at USD 58\/bbl, is already selling at a discount of around USD 25\/bbl over Brent. In that publication, we argued that the ideal price-cap spectrum would be between USD 30\/bbl and USD 70\/bbl. The rationale is the following. The average production cost for Russian oil is around USD 30\/bbl, while its pre-war fiscal breakeven price was around USD 70\/bbl (which is probably higher now as a result of higher spending related to the Russia-Ukraine crisis and a fall in non-energy-related tax revenue due to the current slump in economic activity). Thus, a price above USD 30\/bbl would incentivize Russia to sell its oil, and a price below USD 70\/bbl would hurt its public finances. Negotiations are in play to agree on a cap ahead of 5 December, when Europe\u00b4s embargo on Russian crude traveling by sea takes effect. For the last few days, European diplomats have struggled to find an agreement on a widely supported price cap ' that would apply to all importers of Russian oil using Western trade infrastructure, shipping, and insurance. Western European countries favor a cap of around USD 65-70\/bbl ' that is above where Urals is trading now and is at the high end of our spectrum. Eastern European countries, instead, think that a cap of this kind would be too generous for Moscow and would not have a meaningful impact on its public finances. They would rather set the ceiling around USD 45\/bbl. Ukrainian President Volodymyr Zelenskyy, whose country is not part of the negotiations, went a step further last Saturday when he suggested setting the cap USD 30-40\/bbl ' the low end of our spectrum. In our view, an easier solution would be to set a floating spread for\u00a0Russian\u00a0crude pegged to where Brent is trading, because oil prices are ultimately determined by global market forces. If demand and supply factors pushed Brent below the price cap, then the cap itself would be ineffective, as Urals prices would likely be close to those of the global benchmark. Instead, a floating spread might adjust automatically depending on where Brent is trading. If Brent prices decrease considerably, let\u00b4s say towards USD 30\/bbl, then the spread can be reduced in order to prevent Urals prices from moving below Russia\u00b4s production costs (otherwise, Moscow would have little incentives to keep pumping). Equally, if Brent prices rise towards USD 100\/bbl, for example, then the spread might be increased to levels similar to those recorded over the last six months. CHART 1. DECOUPLING BENCHMARKS<\/li><\/ul>"},{"layout":"linklist","uid":28725,"publicationDate":"27 Nov 14:17","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184324.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJPMscoAUz3408HDDhRm0j-I=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Sunday Wrap - Sunday Wrap","product":"Sunday Wrap","synopsis":"Greetings from Berlin,Happy first Sunday of Advent if you celebrate it, and a belated happy Thanksgiving to my American friends and readers. During my ten years in the US, Thanksgiving was my favorite holiday because of its four quiet days with family and no other agenda than being together, cooking and eating (I\u00b4m not much of a shopper, as you can tell.)Thanksgiving marks the beginning of the final stretch of the year and that invites the necessary reflections on the year gone by before the thinking about what may lie ahead can begin.2022 became the year when a number of underlying tensions boiled over into various forms of crises or near-crisis. The UK\u00b4s Brexit mess, the European rule-of-law-versus-money dilemma, the crypto-fata-morgana and the questionable governance of international football all come to mind. But most important of all, of course, the inherent instability of Putin\u00b4s regime boiled over this year, with devastating consequences. Following some ten-years\u00b4 of smaller-scale transgressions, Putin launched his full-scale invasion of Ukraine in February. Military strategists have taken notice of the shockingly poor state of the Russian military, and the bravery and effectiveness of Ukraine when armed and supported by the West. We economists are scratching our heads over the multiple shock waves it released over the global economy, both short and longer term. In reaction to the invasion, the West weaponized to an unprecedented extent its financial and commercial hegemony to cut Russia and its elite off from the privileges offered by the Western world in the hope of squeezing the economy into submission. The unwillingness by literally all major emerging markets, including the four other BRICS countries and Turkey, to take sides in the conflict, let alone their eagerness to increase trade with Russia, has been a shocking eye-opener for the West. It displays for the first time the magnitude of the shifting geopolitical power structures. Ivan Krastev had a great piece on that issue in the FT this past week: Middle Powers are reshaping geopoliticsMeanwhile, Russia has weaponized its commodity supplies, basically cutting off gas to Europe. This, along with China\u00b4s mishandling of the pandemic (another example of underlying tensions now threatening to boil over, apparently) and other remaining bottlenecks, led to the greatest cost-of-living shock in Europe in decades.And while at a much more civilized level, this in turn brought several of the underlying tensions between European policymakers to the boiling point. It\u00b4s not too farfetched to say that while Putin ended up uniting, rather than splitting, Europe internally, and vis-a-vis the US, in terms of our security alliances, the economic shock to real income which he triggered has divided European economic policymakers like rarely before.The roll-out of extensive national fiscal support measures for consumers and businesses has raised concerns about the level playing field in the Single Market. This has pitted governments against each other, particularly with respect to the need for a common approach, specifically in the form of a price cap for gas. Meanwhile, fiscal policymakers (and higher up, I\u00b4m told) are getting increasingly worried about an ECB seemingly more focused on its own reputation than a well-balanced outcome, which causes further hardship for lower-income households with mortgages and other debt. The ECB, in turn, has turned increasingly explicit about its single-minded pursuit of price stability, and its annoyance with the fiscal measures which it sees as counter-productive to its objective. And to complete the circle, European policymakers are now on the verge of opening yet another front in their policy battles, namely against US, where the USD 369bn Inflation Reduction Act and its huge subsidies and tax breaks to businesses is scheduled to go into effect within weeks.I\u00b4ll focus on the European battle between monetary and fiscal policies. Specifically:<ul class=\"ucrBullets\"><li> I\u00b4ll discuss what seems to be an opening division inside the ECB about the pace of tightening from here. In my view, the ECB should pause now, but it won\u00b4t'.<\/li><li> 'and that causes further trouble for fiscal policymakers already struggling with fiscal support measures vs price caps as the poorer households increasingly are being hit with higher interest rates.<\/li><li> The ECB should pause, but it won\u00b4t 'I trust you are familiar with my long-held assessment that the ECB is most likely to overdo its policy tightening, causing more harm than good down the line. Short term, i.e., the next couple of quarters, is not my great concern. Indeed, the latest indicators point towards only a shallow recession during the winter, which would be better than what I have been fearing. My real concern is 2023-24 when this year\u00b4s monetary policy tightening will have maximum impact on demand and work as an amplifier of the pain on households and businesses of higher energy prices ' and that just as most of the fiscal support may then need to be rolled back. The gist of my argument is that we are experiencing a clear case of a cost-push inflation shock which undermines real income and reduces demand. This type of inflation will decline by itself when the effect of higher commodity prices, and a bit of spillover, reduces demand and washes through the year-on-year index. It\u00b4ll leave households permanently poorer until alternative ' and hopefully cheaper ' energy sources have been developed. The right policy response to such a shock is fiscal support to the vulnerable households and businesses to smooth the transition to the new state of affairs, fiscal and structural policies to speed up the transition to sustainable energy - and very little, if any, monetary policy tightening. This is distinctly different from a situation of demand-pull inflation which calls for both monetary and fiscal policy tightening to dampen demand.But this is not how the ECB sees it ' or is it' In a phenomenal 15,000-word blog ('Inflation Diagnostics') published this past Friday, Philip Lane provides the most detailed discussion so far of the sources of inflation, the spillovers and risk to inflation expectations and wage developments. It\u00b4s the finest piece I have read on European inflation so far ' by a mile. It really is a must-read for anyone interested in ECB policies. It\u00b4s here: Inflation DiagnosticsWith the risk of misrepresenting the totality of this enormous piece, let me highlight the following: That elevated inflation is overwhelmingly driven by commodity prices is well documented in text and charts. A courageous attempt to identify a demand-component leads Lane to estimate that maybe 40% of the roughly half part of the inflation rate in August that is non-energy industrial goods inflation could be demand-driven, while 70% of this component of inflation in services could be demand. On my math, that means that demand may account for some one-fourth of European headline inflation now. Even so, 'the demand-side contribution to inflation during summer 2022 can be linked to the re-opening of contact-intensive services sectors, including a surge in tourism that outstripped industry expectations,' writes Lane. In other words, the demand part of inflation is a case of pretty small and one-off potatoes.Yet, when it comes to the policy conclusion, it seems that Lane loses trust in the persuasiveness for the broader audience of his excellent analysis: Fearing a de-anchoring of inflation expectations, he writes, 'Longer-term inflation expectations are most likely to be reset if it is feared that the central bank might be unwilling to take the monetary policy measures needed to make sure that inflation returns to the two percent target in a timely manner.' (Note 'timely manner', which I\u00b4ll come back to.)But what exactly are those measures which need to be taken not only to return inflation to 2%, but to persuade 'expectations setters' (i.e., professional forecasters and markets, I presume) that inflation will get back to 2%'While Lane does not provide an answer to this question, he pitches hard ' and rightly ' for a proper framework for making that decision. In his conclusion, he writes, 'In calibrating this interest rate path, there is no short cut: the medium-term inflation path (and thereby the required scale of the monetary policy adjustment) is best evaluated through comprehensive assessments that incorporate the full range of economic, monetary and financial variables that shape inflation dynamics'. To hammer that home, he notes that this 'is best conducted in the context of a comprehensive macroeconomic projections exercise (jointly assessed with a full review of monetary and financial conditions), in view of the inter-connections between economic activity levels, financial conditions (including the interest rate path) and inflation dynamics. Accordingly, while partial-equilibrium approaches ' certainly play a useful role in updating inflation priors on a week-by-week basis, the richest inflation assessment is produced through the integrated joint analysis of nominal indicators, economic activity measures and monetary and financial conditions'. Read: You cannot just look out of the window and get scared about present inflation!Of course, 'the conditional nature of inflation projections should always be fully appreciated. Shocks can generate ex-post inflation deviations even if the ex-ante modelling of the likely future inflation path were 'best in class'.' In other words, the forecasts have not worked for a while because of shocks, but that does not mean the models should be thrown out!Instead, 'for policymakers, this intrinsic uncertainty can be addressed through a full range of scenario analyses that probes the sensitivity of projected inflation to alternative assumptions or model specifications. Conducting such robustness exercises is especially important when the degree of intrinsic uncertainty is particularly high in relation to post-pandemic normalization, the course of the war, the potential strength of second-round effects via wage growth and the stability of inflation expectations'. Having heard these past 6-9 months a fair number of ECB Governing Council members dismiss models and any other approach to forecast inflation (apart from their own gut feeling), I can\u00b4t help but conclude that this is the ECB chief economist\u00b4s appeal to his colleagues to re-anchor their policy decisions to a proper framework for evaluating future inflation and the forward-looking impact of policies. As such, it\u00b4s a masterpiece. I hope the ECB will hold a seminar on this blog for Governing Council members (and for ECB Watchers for that matter)' and we should all pass a test afterwards to be sure we understand the fundamentals of the presently elevated inflation! (Here\u00b4s an idea: GC members who don\u00b4t pass the test won\u00b4t vote on policy matters, and Watchers who fail the test will stop commenting') When evaluating the incoming data for the forward-looking exercises, the evidence that this is indeed predominantly a temporary cost-push inflation is now starting to become visible.Even in the US, where the 'supply shock case' is less evident, headline inflation has come off its peak, and in Europe, the signs are now also emerging. This past week, German producer prices came off sharply (-4.2% month-on-month) from their peak last month, driven by energy prices, while the Eurozone PMIs price gauge, while still at elevated levels, fell to its lowest level in two years, driven by the biggest drop in input prices in more than ten years. And in wage developments and the much feared German wage settlements, there were good news too this past week. Germany\u00b4s trend-setting IG Metall agreed to a wage deal through September 2024, which includes + 5.2% from June 2023, followed by 3.3% from May 2024 plus two one-off (tax free) EUR 1,500 payments, a deal very much made possible by government\u00b4s granting of tax exemption for the one-offs.In other words, there is no sign of a wage-price spiral, but rather an apparent acceptance by unions that the price shock needs to be shared across society with labor getting only partial compensation for the drop in real income. This shouldn\u00b4t surprise anyone. We are many who have argued the no-wage-price spiral case for a long time. Latest, two weeks ago, the IMF\u00b4s research team published a review of wage-price spirals in industrial countries since the early 1960s. They conclude, 'An acceleration of nominal wages should not necessarily be seen as a sign that a wage-price spiral is taking hold'. Their excellent piece is here: Wage Price Spirals What is the Historical Evidence.Nevertheless, the ECB seems in no hurry to take its foot off the brake:In her speech a week ago, President Lagarde made it clear (again) that more hikes are coming and that 'withdrawing accommodation may not be enough. Ultimately, we will raise rates to levels that bring inflation back down to our medium-term target in a timely manner'. And while interest rates will remain their main tool, 'we also need to normalize our other policy tools and so reinforce the impulse from our rate policy'.\u00a0 Her speech is here: Monetary policy in a new environmentThe speech left me with two questions: What do they have in mind when they say 'a timely manner'' (remember, Philip Lane used the same code wording in his blog) ' and does a 'need to normalize our other policies' not imply a balance sheet objective, as opposed to an objective to create financing-conditions to get to 2%' In other words, how much pain are they willing to impose on the economy in order to get to 2% by, e.g., the end of next year or by early 2024' What is 'a timely manner'' And what is a 'normalized balance sheet' and why is this seemingly now an objective in itself' I suspect the answers to these questions depend on their fear for their reputation ' a fear that I have underestimated this year because of the degree to which monetary policymakers appear to think of their reputation as asymmetric: 'Overkilling' (leading to lower inflation, lower GDP and higher unemployment in 2023-24) is seen as better for the central bank\u00b4s reputation than 'underkilling' (i.e. taking a longer time to get to 2%.)And now some added complexity: On Thursday, Isabel Schnabel gave another one of her always excellently argued speeches ' but it was one that left a distinctly hawkish message relative to Lagarde and Lane. (Finding the right mix: monetary-fiscal interaction at times of high inflation) Rather than wanting to bring inflation back to 2% 'in a timely manner' (the term used a week earlier by Lagarde and this past week by Lane), Schnabel wants inflation at 2% 'as quickly as possible'. And while I read the incoming data as quite comforting (both with respect to the inflation and GDP outlook), Schnabel reads the data to 'suggest that the room for slowing the pace of interest rate adjustments remains limited'. Having established a record of delivering speeches with policy conclusions closely aligned with Lagarde\u00b4s view, this sounds like they may be aiming for another 75bp in December, ahead of market expectations.Yet, in a subsequent interview with Market Views, Philip Lane ' who so carefully replicated Lagarde\u00b4s key sentences in his blog when it came to policy conclusions - clearly suggested a smaller hike in December, presumably of 50bp. His answer to a question what it would take for him to recommend raising rates by 75 basis points in December, he replied: 'It\u00b4s usually neither necessary nor wise to try and jump immediately to your target rate. In December, we will make another hike and the scale of it should continue to make progress towards the levels needed. But ' considering a very large hike, such as 75 basis points, is no longer there.' Here: Interview with Market NewsSo, what will they do in December' 50bp or 75bp' I really don\u00b4t know, but I take some comfort from the Fed minutes this past week which clearly suggested that they\u00b4ll hike by 'only' 50bp when they meet the day before the ECB in December (on the 13-14th, with the ECB following on the 15th.)I\u00b4ll offer the following four observations for the ECB decision: (1) They should pause and do nothing, not least as they have set themselves up to start QT ' but, of course, that won\u00b4t happen; (2) If they do 50bp, it\u00b4ll look as if Schnabel has left the center-ground to align herself with the hawks and that they, in turn, have moved into a minority; (3) if they do 75bp, the hawks remain in charge and it\u00b4ll look as if they have more fundamentally dismissed the good council and detailed research of their chief economist and decided to fly blind; (4) Could it really be that the decision will be determined by the November inflation number to be released ahead of the meeting, mad as that would be'\u00a0 <\/li><li> ECB will keep going '. And that causes trouble for fiscal policymakers.As I wrote above, when an economy is hit by a massive energy price shock, the right fiscal policy is to protect vulnerable households and businesses from financial ruin because that would have both longer-term economic and political ramifications. It\u00b4s also, in my view, a matter of simple fairness within a society. And fiscal incentives and public investment programs should rolled out to accelerate the transition to sustainable, and hopefully cheaper, energy.According to Bruegel, between September 2021 and 20 October 2022, a total of EUR 573bn, including EUR 264bn in Germany alone, has been allocated and earmarked to shield consumers from rising energy costs, ranging from rather short-term measures to commitments for up to 30 months (as is the case with the German mega-package). (National fiscal policy responses to the energy crisis.)On an annualized basis, the support of most countries, including Germany, is 2.0%-2.5% of GDP, which means that the public sector has taken roughly one-third of the hit so far (not to be confused by the burden for future taxpayers because GDP will be faring a whole lot better with this support than in the counterfactual.) According to the European Commission, the net budgetary cost of energy measures presently announced for 2023 amounts to about 1% of GDP, rising to 2% of GDP if all current measures are extended throughout 2023. This, in turn, would raise the Eurozone\u00b4s cumulative budget deficits to 3.7% of GDP from the presently estimated 3.2% of GDP (again, reflecting also the better GDP numbers in that scenario.) As noted above, these fiscal costs would have to be temporary and the odds are that they\u00b4ll need to be rolled back maybe exactly when the maximum burden of this year\u00b4s monetary tightening hits, namely in late 2023 and 2024.When providing fiscal cushioning against the commodity price shock, two guiding principles ought to be followed ' but they are surely easier to articulate on my laptop here in my caf\u00e9 than they are to design in practice and then operationalize.First, since the increase in oil and gas prices is a God-sent because it massively discourages the use of carbon-based energy (it\u00b4s only a matter of the speed and extent that is a concern), the fiscal support should not directly lower oil and gas prices. Rather, it should be handed out as cash, leaving the incentive structure in place to reduce as much as possible the consumption of polluting energy. In other words, price caps ' in whatever form ' are rarely good economics. They run counter to the green objectives now politically facilitated by Putin\u00b4s madness, they mess with the private sector\u00b4s (more efficient) resource reallocation, and they create distortions which may cause trouble when it\u00b4s removed again.In addition, the practical and technical terms for such a price cap is nightmarish to contemplate ' even on a good day. Not surprisingly, therefore, when the European Commission was mandated to come up with a proposal for such a cap for gas prices, the result was ' in the words of the supporting Spanish minister ' 'a joke' because it had been constructed (maybe conveniently') in a way that put the cap so high that it would not even have come into effect at the most extreme price level seen so far. So, the energy ministers failed to reach agreement on Thursday, but kicked the can down the road to another meeting next week which ' I\u00b4m guessing ' may kick it further down to the Council meeting of heads of state on 15-16 December (wonderfully timed to coincide with the ECB meeting on the 15th). This blog by Bruegel on the issue of a gas price cap is excellent: To cap or not to cap: the deal Europe needs on energy prices.Second, the support to households should be as targeted as possible to help only the most vulnerable ' and it should be temporary. The European Commission and the ECB have both moaned about the fact that only about one third of the support is targeted while the rest is general support. However, again, the difference between what looks right here on my laptop and in operational policies is an issue:Given the size and focus of the cost-of-living shock, one would likely need to include households with income well in the middle-income ranges as vulnerable. But that then raises the question of the cost of means-testing the population and its energy bills versus a blanket-coverage program. Also, if the concern is the impact on aggregate demand, and hence inflation, as noted by the ECB, the 'cost' of the simpler 'blanket-approach' falls further because wealthier households have a higher propensity to save (or, put in economic terms, the aggregate demand multiplier is smaller for non-targeted support.) The support to businesses is even more complicated because of the vast differences in energy intensity between sectors. While my local baker can simply discontinue the production of my favorite bread (as he has!) because it needs two hours in the oven, and the cost therefore has become prohibitive, the glassmaker cannot make similar adjustments to his production. For him, it\u00b4s a matter of commercial life or death. And if glassmakers, chemical factories and other energy intensive industries close down as a result of the shock (or move to countries friendlier to Putin where energy is cheaper), the supply chains will face trouble. Yes, support to businesses implies a risk of tilting the level playing field in the Single Market, but this an issue that can ' and should - be addressed once the present fire-fighting to keep the economy afloat has been successfully completed.So much for the opposing fiscal and monetary policies in a time of a big cost-push price shock ' so far. But it\u00b4s now getting worse. This past week saw the first warning shots ' and action ' of an explicit tit-for-tat between the two sides:In her speech in London this past week (referred to above), Isabel Schnabel said that if 'the central bank is fully credible ' because it has earned a reputation of safeguarding price stability ' monetary dominance prevails, implying that monetary policy is going to tighten by more if fiscal policy is too accommodative'. To be clear, this is pretty standard central bank talk, and there is nothing wrong with it as an analytical observation. But it raises questions when the inflation is so clearly a predominantly cost-push shock with significant threats to real income, and indeed to political and social cohesion ' not least when so many monetary policymakers have dismissed ' explicitly or implicitly - the model-based forward looking approach to policies. Put differently, unless Philip Lane persuades his colleagues with his blog, we are not far from a slippery slope on which central bankers might set policies depending on whether they 'like' fiscal policies or not ' and not based on proper frameworks for the effect of fiscal policy and other input on inflation, but on 'gut feelings'.\u00a0\u00a0\u00a0\u00a0 At the same time ' over in the other trenches ' some fiscal authorities are now taking action as a direct result of ECB policies and communication, which has tightened financing conditions tremendously.Depending on the structure of mortgage markets, including fixed vs. floating rates, leverage ratios and the distribution of mortgages across income groups, some countries are now getting hit harder than others. Germany and Spain are among the hardest hit, and this week Spain announced that it\u00b4ll support more than one million households to lower the interest rates on their mortgages. Now that is talking about economic policymakers working against each other'These tensions are far from over and the more policymakers pull in different directions, the less good is the outcome likely to be.May I suggest an urgent closed-door conference between the Ecofin, if not even the heads of state, and the ECB\u00b4s Executive Board to agree a cease-fire and a common strategy for 2023. It\u00b4s desperately needed!And with that, I\u00b4m off for a hopefully peaceful visit to Berlin\u00b4s beautiful botanic garden on this lovely first day of Advent.BestErik <\/li><\/ul>"},{"layout":"linklist","uid":28717,"publicationDate":"24 Nov 11:42","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184315.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJPMscoAUz340jc6SG44-LuQ=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Chart of the Week - The LNG shortage might worsen in winter 2023\/2024","product":"Chart of the Week","synopsis":"<ul class=\"ucrBullets\"><li> Europe will likely have enough natural gas to safely navigate the upcoming winter thanks to high storage levels, a strategy of supply diversification away from Russia, mild weather conditions in the early fall, and policies of consumption reduction. But the situation by winter 2023\/24 might be more challenging for three reasons. First, the inflow of Russian natural gas in 2023, if any, is likely to be significantly lower than this year and alternative providers in North Africa and Central Asia might not be able to fill the gap. Second, Europe and Asia will compete to secure access to spare floating storage and regasification units that are in high demand but short in supply. Third, the LNG market will be tight and unlikely to provide a sufficient cushion to any supply shortage. <\/li><li> Our Chart of the Week shows that in 2022 LNG demand in Europe surged by almost 40mmt, to around 115mmt, up 35% from pre-pandemic levels. In doing so, Europe has offset around 50% of the decline in Russian gas so far. The expansion of European LNG imports was made possible by both demand and supply factors at global level. First, the increase in European demand was partly offset by a drop in Asian consumption due to high prices, COVID-19-related restrictions in China and mild weather. Overall, demand in Asia is expected to be lower by around 9mmt in 2022 compared to the previous year. Second, a sharp expansion in supply, to the tune of around 30mmt, contributed to meeting surging European demand. <\/li><li> Next year, the LNG outlook is not so rosy for importers, particularly in Asia and Europe. According to Bloomberg, which takes into account announced new LNG investment and the dismissal of ageing plants, in 2023 global LNG supply will expand by around only 2mmt. This is unlikely to be enough to meet a full recovery in Asian demand, with the zero-COVID strategy in China remaining the main uncertainty regarding China\u00b4s energy demand. This means that, assuming flat demand in Europe, the two regions will increasingly compete to secure access to tight LNG supply, putting upward price pressure on both LNG and natural gas regional benchmarks. Emerging economies in Asia, which are more price sensitive, are likely to lose out, with risks of power shortages in some countries. And things could get even worse. If Russia decides to halt gas the remaining exports to Europe completely, an additional 20mmt of LNG supply would be needed to fill the gap. So, overall, the LNG market might be short of around 25mmt next winter.<\/li><\/ul>"},{"layout":"linklist","uid":28713,"publicationDate":"23 Nov 12:49","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184310.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJPMscoAUz340GrkeNVWnWY0=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Data Comment - Eurozone PMIs confirm mild-recession scenario","product":"Data Comment","synopsis":"<p><ul class=\"ucrBullets\"><li>The eurozone composite PMI improved slightly in November, edging up to 47.8 from 47.3 in October (Unicredit: 46.8, consensus: 47.0). This was the first increase since April. The outcome dispels fears of a severe slump and is consistent with a mild technical recession at the turn of the year, broadly in line with our forecast. The improvement in the composite index reflects a milder pace of contraction in manufacturing while the pace of contraction in services activity was unchanged compared to the previous month, with the stabilization reflecting differing developments across countries. Services activity showed a significant loss of momentum in France, where the services PMI dropped in contraction territory for the first time since early 2021.<\/li><li>Despite the improvement, the downturn in manufacturing remains deep as both new orders and output indices rose to a 40-45 range. The press release signals that the improvement in supply bottlenecks, particularly noticeable in Germany, was one of the main drivers of the easing in recessionary forces, reducing the downside risks to activity. Warm weather also helped dispel fears that energy shortages could weigh on production. In the services sector, the new business index remained broadly unchanged at the lowest level since 2013 (excluding lockdown months). <\/li><li>Pipeline price pressure continued to recede, especially in manufacturing (where the output price index declined to a 20-month low), reflecting weaking demand and reduced stress on supply chains. Nonetheless, the intensity of price increases remains elevated, well above pre-pandemic levels.<\/li><li>The labor market continued to show resilience, with the employment subcomponent of the composite PMI declining slightly but remaining comfortably in growth territory (at 52.0). At sector level, hiring plans were unchanged in manufacturing while they were revised down somewhat in the services sector. In greater detail:The composite PMI increased to 47.8 from 47.3, with the index for the manufacturing sector edging up to 47.3 and the one for the services sector remaining unchanged at 48.6.<\/p><\/li><\/ul>"},{"layout":"linklist","uid":28698,"publicationDate":"20 Nov 14:00","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184263.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJMFJK6gFt5IcPC3i_kaCOFE=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Sunday Wrap","product":"Sunday Wrap","synopsis":"Greetings from Oxford,I\u00b4m tied down this weekend with family matters, but I have something else for you to read this Sunday afternoon, namely the brand new outlook from UniCredit\u00b4s research team, in which they have fine-tuned their 2022-23 forecast and for the first time quantified the outlook for 2024. Published Thursday afternoon, and titled 'Go for carry as central banks approach peak rates', it\u00b4s a comprehen-sive forecast across macro and markets with brief summaries of the international backdrop to Europe and each of the major economies, as well as markets. It is, if you don\u00b4t mind me saying, the best in the market!Here\u00b4s our Global Head of Research, Marco Valli\u00b4s, summary of the overall report:<ul class=\"ucrBullets\"><li> 'The global economy faces increasing headwinds as the largest, fastest and most synchronized tightening of global monetary policies in decades compounds the effects of big terms-of-trade shocks in several countries and high inflation. Unfavorable geopolitics adds to uncertainty, mainly because of tensions between the West and Russia and China. We expect global GDP to rise by only 1.9% in 2023, a de facto recession. Risks are tilted to the downside.<\/li><li> We see GDP growth in both the US (-0.1%) and the eurozone (0.0%) stagnating in 2023, with a technical recession in the eurozone at the turn of the year and in the US in 1H23. Supportive fiscal policy in the eurozone, tight labor markets, reasonably healthy private sector balance sheets and a further easing of bottlenecks should prevent a deep slump. In the eurozone, Germany and Italy are likely to be more affected by the current energy crisis and downturn in the manufacturing sector, while France and Spain will probably perform slightly better. Due to the lag in the impact of monetary policy and delayed softening of the labor market, we expect a below-trend recovery in 2024 both in the US (0.9%) and the eurozone (1.0%). The UK is facing a sequence of large supply shocks that are damaging its growth outlook. China\u00b4s growth is likely to reaccelerate, but its path should remain bumpy as the country struggles to emerge from the pandemic and a real-estate downturn.<\/li><li> Inflation in the US (mainly demand-pull) remains fundamentally different from that in developed Europe (pre-dominantly cost-push). That said, the disinflation pattern penciled into our forecasts follows common trends in underlying inflation on both sides of the Atlantic. Core-goods prices decelerate first, amid post-pandemic con-sumption shifts and rate hikes affecting durable-goods consumption. Service-price inflation will fade more slowly, especially in the US. So far, firms\u00b4 profitability has been resilient. Demand compression, which central banks are keen to accelerate, will likely put pressure on profit margins, slowing CPI growth. We see inflation declining to around 3% in the US and 2.5% in the eurozone by the end of 2023, and to 2% by mid-2024.<\/li><li> Central banks are fighting hard for their credibility and will probably want to keep financial conditions tight until they feel very confident inflation is on its way to target. We see policy rates peaking at 5% in the US and at 2.75% in the eurozone. The ECB\u00b4s quantitative tightening will likely initially involve a reduction of the APP port-folio by about EUR 15bn per month. We expect to see a turning point in monetary policy in 2024, with the Fed cutting rates by a cumulative 150bp and the ECB by 75bp.<\/li><li> In CEE countries belonging to the EU (EU-CEE), GDP is expected to grow by 0.4% in 2023 and by around 3% in 2024. We forecast a technical recession in the coming quarters, followed by a rebound in 2H23. Russia\u00b4s recession could deepen to -5% next year, followed by a recovery to around 2.5% in 2024 if there is gradual improvement in aggregate supply. In EU-CEE, inflation is likely to remain outside target ranges throughout our forecast horizon, limiting the scope for rate cuts by the end of 2024.<\/li><li> After the recent rally in risky assets, we suggest entering 2023 with a more defensive allocation, preferring fixed income to equities and developed to emerging market exposure. Bonds offer attractive carry and better risk-adjusted return prospects, while equities will face weak profitability and initially little tailwinds from valuations. At end-2023, we target 3.75% for the 10Y UST yield, 2% for the 10Y Bund yield and 2.50% for the 10Y EUR swap. We like IG and HY credit in Europe and retain a cautious view on duration. However, peaking policy rates and signs of economic recovery should pave the way for more risk taking in 2H23. In FX, the main story is likely to be a correction of USD strength, although the speed of the latest move is probably excessive. We expect EUR-USD to be back to 1.10-1.12 by the end of our two-year forecast horizon. USD-JPY will likely ex-tend its slide below 135, while we do not see much downside potential for USD-CNY below 7.00. We are bear-ish on the CEE3 currencies (PLN, HUF and CZK), the TRY and the RUB.'I hope this has whetted your appetite sufficiently to take a look at the entire report. It\u00b4s worth it! The link is here, and inside you\u00b4ll also find links to the presentation with the charts and to a brief webcast by Marco Valli and Deputy Head of Strategy, Elia Lattuga, summarising it all: The UniCredit Macro & Markets 2023-24 OutlookAnd looking ahead to the more immediate future, on Thursday, when our American friends celebrate Thanksgiving, the European energy ministers meet in an attempt to agree on a cap on gas prices, following the European Commission\u00b4s proposal. I remain hugely sceptical about the wisdom of such a cap, and I rather suspect that there are enough sceptics around the table to prevent a decision this coming week, in which case it\u00b4ll be kicked up to the heads of state\u00b4s European Council meeting on 15-16 December ' which, on 15 December, coincides with the ECB\u00b4s last policy meeting of the year.Both will be great topics for next Sunday when I\u00b4ll be back with a normal Sunday Wrap. BestErik<\/li><\/ul>"},{"layout":"linklist","uid":28674,"publicationDate":"13 Nov 12:03","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184232.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJMFJK6gFt5IcSSt7PcgR3bQ=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Sunday Wrap","product":"Sunday Wrap","synopsis":"<ul class=\"ucrBullets\"><li><strong> The world of politics: <\/strong> Trump, Putin, Biden and Xi ' two down, two up. Good for the world.<\/li><li><strong> The world of economics: <\/strong> US inflation print was the first clear victory for 'Team Transitory', but will the ECB, where the case is even stronger, care' A new wage-tracker may distract them.<\/li><li><strong> The world of confusion: <\/strong> The long overdue farewell to crypto currencies ' I hope.<\/li><\/ul>"},{"layout":"linklist","uid":28673,"publicationDate":"11 Nov 16:44","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184231.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJMFJK6gFt5IcT-lUQpxjC7o=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Chart of the Week - Eurozone: lower vulnerability to higher rates this time, but...","product":"Chart of the Week","synopsis":"<p><ul class=\"ucrBullets\"><li>Our Chart of the Week compares net interest payments (defined as interest payments minus interest earnings) for the government, non-financial corporations (NFCs) and the household sector in the four largest eurozone countries, before both the ECB\u00b4s current hiking cycle and that of 2005-2008. Net interest payment reflects both the level of interest rates and the stock of interest-bearing assets and liabilities1. For the sake of comparability, we express net payments as a percentage of GDP.<\/li><li>The chart shows that, in general, eurozone countries are comparatively well positioned to face the current rate shock. In greater detail, net interest payments faced by governments is below that of 2005, thanks to a lower level of interest rates. Spain is the exception here, given that public debt as a share of GDP is now almost 120%, as opposed to 40-45% in 2005. The picture looks uniformly more favorable for the corporate sector, where net interest payments are much lower now than in 2005 (except in Germany, where there is little change). In the household sector, where interest-bearing assets typically exceed liabilities, the situation looks similar to that of 2005 with the exception of Italy. Here, reduced interest income reflects to a large extent the lower share of interest-bearing assets being held as Italian households\u00b4 portfolios have increasingly moved towards (typically more risky) non-interest-bearing assets.<\/li><li>While our chart suggests that rate hikes are likely to be manageable, we point out that cumulative monetary tightening this time around is very likely to end up being larger than that of 2005-2008, when the ECB increased its policy rate by a total of 225bp. Moreover, households are under huge pressure due to surging inflation and falling real income, which is especially affecting the most vulnerable part of the population. This will compound the impact on growth from higher rates.Notes:<\/li><li>We assume that the following financial instruments generate interest: deposits, debt securities and loans. In our analysis, we only consider households\u00b4 direct holdings of interest-bearing assets, while we do not take into account holdings through investment funds, pension funds and life-insurance schemes.<\/p><\/li><\/ul>"},{"layout":"linklist","uid":28668,"publicationDate":"10 Nov 17:25","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184225.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJMFJK6gFt5IcdoyobTYqkvU=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Data Comment - October CPI: Some good and unexpected news for the Fed ","product":"Data Comment","synopsis":"<ul class=\"ucrBullets\"><li> A single CPI report is not enough to mark a turning point in the US inflation dynamics. But the October reading brings good news on multiple fronts. Headline inflation decelerated to 7.7% yoy from 8.2%. This is the slowest rate since January. In monthly terms, inflation stabilized at 0.4%. More importantly, today\u00b4s report shows early signs of easing underlying price pressures, with core CPI inflation (excluding the volatile energy and food components) decelerating to 0.3% mom from 0.6%. In yearly terms, it dropped to 6.3% yoy from 6.6%. <\/li><li> Looking at the details, there are several bright spots. The most significant surprises come from core inflation. After several positive readings, core goods inflation has finally turned negative, contracting by 0.4% mom, driven by used cars and apparel. This is probably the result of ongoing post-pandemic spending adjustments, the erosion of real incomes and a tighter monetary policy. Core services inflation, instead, continued to rise strongly but decelerated to 0.5% mom from 0.8%, driven by transportation that decelerated to 0.8% mom from 1.9% and medical services that fell 0.6% mom (due to the fall in Medicare premiums that are set in October for the year ahead). The components that saw an acceleration were shelter (up to 0.8% mom from 0.7%) and recreation (up to 0.7% mom from 0.1%). But shelter accelerated due to an increase in hotel prices (a very volatile category), while rents decelerated somewhat.<\/li><li> Focusing on headline inflation only, food prices increased by 0.6% mom, down from 0.8%. Energy prices, instead, after two consecutive months of decline, rose again by 1.8% mom as a result of the new output cuts announced by OPEC+ early last month that pushed oil prices higher.<\/li><li> Although inflation is still far away from its 2% target, the Fed can breathe a sigh of relief for now. This is consistent with our call that the Fed will start slowing down pace of its rate hikes at the December meeting, raising rate by 50bp and no longer by 75bp. Markets have cheered today\u00b4s news, with Treasury yields dropping, the USD weakening and stock prices rising. More in detail: Despite the positive news from today\u00b4s reading, with both core and headline inflation decelerating, inflation in the US remains at levels not seen since the eighties (chart 1). The Fed needs to press ahead, albeit at a slower pace. CHART 1. DECLINING, BUT STILL A LONG WAY TO GO<\/li><\/ul>"},{"layout":"linklist","uid":28648,"publicationDate":"06 Nov 12:36","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184199.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJPO7NAp4CXSy96qGP7d-zyc=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Sunday Wrap","product":"Sunday Wrap","synopsis":"<p class=\"ucrIndent\"><p>Greetings from a beautiful sunny morning here in Berlin,I, like many others, have been extremely worried for quite some time about the global outlook. The geo-political picture is worrisome, to say the least, while global growth seems to be on a path to recession on account of the massive commodity shock and other dislocations. And the world\u00b4s central banks are tightening their monetary policy stances at an unprecedented pace, and in a virtually coordinated way, to bring this (predominantly cost-push inflation) back to the target of 2%. This is likely to weigh on growth for the next couple of years.This past week, we have had mixed news in both geopolitics and for the economic outlook, but due to (wonderful social) obligations this weekend, I\u00b4ll be quick today and only briefly mention the key points, rather than discuss them in detail. As compensation, I\u00b4ll attach a hopefully useful, self-explanatory, version of several presentations I have given these past couple of weeks to various groups of UniCredit clients. First, geopolitics:We got a bit of hope on the geopolitical front this past week. German Chancellor Scholz\u00b4 visit to Beijing triggered the first clear public warning from the Chinese leadership to Putin about the use of nuclear weapons. President Xi called on the international community to 'reject the threat of nuclear weapons', according to the Chinese state news agency Xinhua. This would surely have been communicated privately to Putin at an earlier date, and it almost certainly goes a long was to explain Putin\u00b4s reversal on the topic in his speech the week before last. One would have hoped, of course, that China would have gone further and distanced itself from the Russian invasion - but the no-no to nuclear was one good step in the right direction, and in itself easily worth a political leader\u00b4s trip to Beijing.I also take comfort from Lula\u00b4s victory last weekend in Brazil, although he too sits on the fence on the issue of the war in Ukraine. Bolsenaro\u00b4s acceptance of defeat, if delayed and less than whole-hearted and only after a host of his key supporters in prominent positions had done so, was a relief. The difference to the US Republican Party elders\u00b4 reaction to Trump\u00b4s refusal to accept the 2020 election outcome is stark - and leaves one wondering if Brazilian democracy is now in better shape than US democracy. And on that note, the geopolitical picture is likely to take a turn for the worse already on Tuesday, when the US mid-term elections are set to deliver a majority in the House of Representatives back to the GOP - and maybe of the Senate as well. I worry about this not so much because of the likely impact on policies, or lack of policies (US support for Ukraine seems to be on the line), but because the GOP includes roughly 300 candidates for public office who have either explicitly rejected the legitimate outcome of the 2020 election or refuse to commit to accept the outcome of Tuesday\u00b4s election. And then, of course, Trump has all but announced that he\u00b4ll formally declare his candidacy for 2024 in the aftermath of a presumably good election result for the GOP this coming week. Oh dear! Another two years coming up with Trump in the news - and the risk that he\u00b4ll actually win back the presidency' Where would that leave Europe in the re-ordering of the geopolitical map'I also worry about the upcoming COP-27 meeting in Egypt. While the surge in the price of energy has done wonders for savings of CO2 polluting energy and should quicken the pace of development of renewable energy (as Union Invest\u00b4s Christian Kopf so succinctly noted at the IMF meetings: 'This type of inflation is not the problem but the solution'), it feels as if most of our political leaders have taken their eye off the climate ball for the time being.Meanwhile, in spite of a few glimmers of hope, the economic outlook remains gloomy:We have had positive Q3 GDP surprises in Germany and Italy, and on Friday the US reported very respectable labor market data but I continue to have my worries about the outlook. The probability that the world is heading into recession is very high indeed, driven primarily by the vast increase in commodity prices, which have eroded real income across much of the world, including in the US and Europe. Lower demand will take care of the excessive level of inflation during the next couple of years, but - as we all know now - the world\u00b4s central bankers don\u00b4t feel they can wait (out of fear that it somehow becomes self-fulfilling - no sign of that, but the fear is there) for that to happen. Consequently, they feel committed to reduce global demand even further and faster to drive down inflation at a quicker pace than what the commodity price shock will do by itself, even at the considerable risk of tanking the economy. To those still calling for tough monetary policy tightening in reaction to present inflation, I remind you that monetary policy action and communication tighten the overall monetary conditions immediately as markets price it in. That then reduces demand and GDP, which will then reduce inflation ' all with a lag of typically 18-24 months. My contention is that by then (i.e. late next year and into 2024), the present inflation shock, particularly in Europe, will almost certainly have subsided substantially by itself as the technical impact of higher cost run through the price indices and as demand will have been compressed by the real income effect (see the attached presentation). And just by then we\u00b4ll get the full force ' on demand and on inflation ' of the sharpest tightening in monetary conditions seen in decades which is now being engineered by the world\u00b4s central banks. This means that the most relevant economic discussion has become \u00b4how deep and how long\u00b4 the recession will be, and not \u00b4whether\u00b4 we get recession. This past week, the three-major western central banks - the Fed, the ECB and the BoE - all sent further decisively hawkish messages. The Fed and the BoE both hiked rates by 75bp and continued thereby the super-fast pace of tightening financial conditions - in their economies and globally. And ECB hammered home its hawkish intentions when President Lagarde spoke in Tallinn.The key take-aways from Chairman Powell\u00b4s statement and press conference were - explicitly! ' that: (i) they\u00b4ll keep hiking rates (although probably at a slower pace) until there is 'decisive' evidence that inflation is moving down to 2% - and here it is pretty clear that they\u00b4ll be looking at monthly core inflation readings (seemingly with little regard for the lagged effect of higher rates on demand and activity), and (ii) they have revised higher their expectations for the terminal rate.The BoE communication was more complex, but still hawkish. On the one hand, they made clear that markets are still pricing in too many rate hikes following the chaos created by the mini-budget. In other words, the correction of the fiscal message has not been sufficiently appreciated by markets. In interviews after the decision, Governor Bailey was pleased that they have managed to drive down the market expectation for the terminal rate from a peak of 6.1% to 4.6%, although the reversal of 'Trussonomics' probably had more to do with it than the Bank statement. So, it was a dovish message relative to what was priced in. On the other hand, the majority of the MPC still see the need for further rate hikes and QT, which is rather hawkish. As my colleague, Daniel Vernazza, put it: The message was less hawkish, but only when compared with the unreasonably high bar set by markets. Meanwhile, Lagarde argued again for the hawkish narrative adopted by the ECB in recent months. Following the rate hikes already implemented 'our job is far from completed', she said, adding that 'withdrawing accommodation may not be enough to bring inflation back to our target'. The speech included the right references to the forward looking aspects of monetary policy, but still no quantified assessment of how much demand the ECB estimates that it\u00b4ll need to kill off to get inflation to 2%, and by when, so that markets ' and the real sector ' can get a sense of where rates may peak. I\u00b4m greatly concerned about the effects of this synchronised tightening of monetary policy across the world. I can literally not find another example of the entire community of OECD central banks (with the exception of Japan) having tightened monetary policy conditions at the same time at this pace - and this in reaction to a price shock that\u00b4s predominantly a case of cost-push inflation (although US inflation certainly also has a sizable demand component and the forward looking risk stemming from stronger wage growth). And it comes during the greatest set of global uncertainties, with practically only down-side risks, in a life-time. Forgive me for being very worried about the outlook for the real sector.I\u00b4m sure I\u00b4ll have plenty of opportunities to discuss all this in detail in coming months - and I can honestly say that nothing would make me happier than the realization one day that all my worries were overblown. I shall then eat my humble pie with the greatest satisfaction - and offer free coffee to every central banker who is making hawkish decisions these days.But for now, I think the odds are against such an outcome. Take a look at the attached charts, I hope they\u00b4ll persuade you. They are all prepared by my colleagues in UniCredit\u00b4s research team (the finest in the industry, if you ask me), headed by Marco Valli. If you are not already following their work, I highly recommend that you get in touch with them to get on their mailing lists.And with that, I\u00b4ll devote the rest of my Sunday to my visiting friends.BestErik<\/p><\/p>"},{"layout":"linklist","uid":28646,"publicationDate":"04 Nov 15:38","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/economics_docs_2022_184197.ashx?EXT=pdf&KEY=C814QI31EjqIm_1zIJDBJPO7NAp4CXSymMCPeHzadDA=&T=1&T=1","protectedFileLinkDe":"","protectedFileLinkIt":""},"title":"Data Comment - US: Payrolls and wage growth remain too strong for the Fed\u00b4s liking","product":"Data Comment","synopsis":"<ul class=\"ucrBullets\"><li> The US economy added a higher-than-expected 261k jobs in October, a modest easing from the upward-revised 315k gain in September. While the trend in monthly payroll gains is down, it\u00b4s only gradual, and it remains well above the level needed to absorb new entrants into the labor force, which we estimate is around 50k. Payroll gains were broad-based across industries.<\/li><li> In October there were conflicting signals between the payroll measure of employment (+261k) and the household survey measure of employment, which fell 328k. The latter tends to be volatile and is compiled from a much smaller sample than the payrolls measure; hence, we attach less weight to it. Nonetheless, it is the household measure of employment that is used to calculate the unemployment rate. The unemployment rate rose accordingly, by 0.2pp to 3.7%, with the fall in household employment more than offsetting the impact of a fall in the labor force participation rate. To be sure, an unemployment rate of 3.7% is very low, well below the FOMC\u00b4s estimate of the equilibrium rate at 4.0%, and even further below the Congressional Budget Office\u00b4s equilibrium estimate at 4.4%. <\/li><li> Average hourly earnings rose 0.4% mom in October, higher than expected, and up from a 0.3% mom pace in the prior two months. In year-on-year terms pay growth eased slightly to 4.7% from 5.0%. The 3M\/3M annualized rate also eased to 4.7%, down from 5.3% in September. Importantly, this is still far too high to be consistent with the 2% inflation target. Indeed, and assuming underlying labor productivity growth of 1-1.5%, it would require pay growth to be in the range of 3-3.5%. <\/li><li> The Fed will almost surely judge that job gains are too strong, and wage growth too high. It supports Fed Chair Jerome Powell\u00b4s assessment this week that the terminal interest rate is likely to be higher than the Fed previously anticipated. However, we still expect the Fed to step down the pace of rate hikes in December to 50bp, as the Fed has indicated, with the post-FOMC-meeting statement de-emphasizing the data-dependency of the pace of rate hikes ahead. Still, with two more CPI reports and the November employment report to come before the Fed\u00b4s next meeting on 13-14 December, the possibility of another 75bp hike remains on the table.Chart 1 shows that monthly payroll gains are slowing, but only very gradually.CHART 1: STILL ROBUST PAYROLL GAINS<\/li><\/ul>"}]

fca5774f669803887558f1f8bf49f8ba6cbad35f9de48a9f1720f5619f212128;;[{"layout":"linklist","uid":28499,"publicationDate":"28 Sep 11:54","emaObject":{"protectedFileLink":"https:\/\/www.research.unicredit.eu\/DocsKey\/emergingmarkets_docs_2022_184011.ashx?EXT=pdf&KEY=l6KjPzSYBBGzROuioxedUNdVqq1wFeRoYLcQZAba8MpzoBozIhtkyg==&T=1&T=1","protectedFileLinkDe":"https:\/\/www.research.unicredit.eu\/DocsKey\/emergingmarkets_docs_2022_184113.ashx?EXT=pdf&KEY=l6KjPzSYBBGzROuioxedUNdVqq1wFeRoF1klgfaq4sGR5On3ncns1Q==&T=1&T=1","protectedFileLinkIt":""},"title":"CEE Quarterly - Testing resilience ahead of the winter (4Q22)","product":"CEE Quarterly","synopsis":"<p><ul class=\"ucrBullets\"><li>Europe is heading into a difficult winter, but we believe that CEE can avoid an energy crisis, even if Russia halts all exports of natural gas to Europe. <\/li><li>We expect a technical recession in 4Q21-1Q23 caused by high energy prices, circumspect consumers, negative credit and fiscal impulses, destocking, imports outpacing exports, low EU fund inflows and falling public investment. A gradual recovery is possible in 2H23. <\/li><li>We forecast economic growth to slow from 4.3% in 2022 to 0.8% in 2023 in EU-CEE, with the Western Balkans lagging this year and outperforming in 2023. We see Turkey\u00b4s economy growing by 5.5% in 2022 and 3.2% in 2023. In Russia, we expect the economy to shrink by around 5% this year and 4% in 2023, with the overall contraction similar to our previous forecast.<\/li><li>Inflation is likely to peak this winter in all CEE countries, as inflation momentum is strengthening only in Hungary. We expect inflation to remain well above target in 2023 due to higher retail energy prices, resilient domestic demand and tight labor markets. <\/li><li>We believe that the CNB has ended its tightening cycle at 7% and the NBH at 13%. We expect the NBP to stop hiking at 7%, the NBR at 6% and the NBS at 5%. The CBRT is likely to cut its policy rate to single digits, hiking sharply in 2023 if the opposition wins the parliamentary election. We expect the CBR to end cuts at 7%. <\/li><li>We expect FX interventions to continue in Czechia, Poland, Romania, Serbia and Turkey. Only the CNB is considering phasing out its FX sales. <\/li><li>Besides a protracted conflict between Russia and Ukraine and its potential spillover to Europe, we highlight the following risks: 1. Russia\u00b4s inability to substitute imports from the West, 2. potential economic sanctions if Turkey continues to cooperate with Russia, 3. low EU transfers as the European Commission focuses on the rule of law, 4. pre-election populism affecting economic policies and ratings, 5. Hungary\u00b4s geopolitical isolation with possible repercussions on FDI, 6. Bulgaria\u00b4s protracted election cycle and the potential postponement of euro adoption and 7. Serbia\u00b4s political reshuffling to avoid choosing between Europe and Russia.<\/p><\/li><\/ul>","hash":"fca5774f669803887558f1f8bf49f8ba6cbad35f9de48a9f1720f5619f212128","available":"0","settings":{"layout":"linklist","size":"default","showanalysts":"-1","showcompanies":"-1","synopsislength":"-1","showcountries":"-1","showcurrencies":"-1","synopsisexpand":"0","nodate":"0","notitle":"0","dateformat":"d M G:i","nolinktitle":"0","noproduct":"0","noflags":"0","shownav":"0","oldestedition":"","limit":"1"}}]