Focus on central banks

A slightly positive start to trading on Thursday as traders eye ECB minutes early afternoon and the start of the Jackson Hole Symposium.

The minutes will likely provide further detail on the reasoning behind a more aggressive start to tightening than the central bank had communicated to the markets and perhaps provide further insight into what we can expect at the upcoming meeting as a result of that move.

The issue with its decision was not that it was wrong to hike by so much – I’m sure most would agree that it wasn’t – rather it was just poorly communicated. And if the central bank wants to offer guidance, it needs to be reliable or it will become ineffective. Another 50 basis point hike is now expected in September.

Is one trillion yuan enough?

China announced a one trillion yuan stimulus plan overnight and investors were not particularly blown away. That may seem odd given the “trillion” number but that’s a reflection of the severity of the headwinds facing the economy at the moment and the consequences of a zero-Covid policy.

The stimulus was largely targeted at infrastructure spending but the view seems to be that this will not be as effective as it has been in the past. The property sector is still experiencing distress and confidence has been very shaken. Lockdowns have further undermined confidence and made hitting the 5.5% growth target all but impossible. It’s going to take something much bolder to repair the damage and as it stands, a cautious approach to monetary and fiscal policy is all there is an appetite for.

BoK continues tightening and signals more ahead

The Bank of Korea continued raising interest rates today, hiking the base rate by 25 basis points to 2.5%, in line with the consensus. It’s unlikely to be the final action this year, with the central bank raising its inflation forecasts for this year and next to 5.2% and 3.7%, respectively, while revising down growth in the same period to 2.6% and 2.1%. Given the desire to avoid inflation becoming entrenched, another 25 basis point hike is expected to follow in October, although much could change in that time.

Germany heading for a recession despite narrowly avoiding contraction

Germany squeezed out a tiny amount of growth in the second quarter, the final Q2 reading showed today. The economy grew 0.1%, revised up from 0% previously. I’m trying to find a reason to be optimistic on the back of that but in reality, it just means the economy may take a little longer to fall into recession.

The German IFO business climate didn’t make for much better reading, falling again to 88.5 – the lowest since mid-2020 – with both current assessment and expectations weak. With the energy crisis unlikely to improve, this likely means another quarter of flat growth at best before the economy falls into recession later this year. ​

Bitcoin missing out

Bitcoin appears to be missing out on the risk rebound today, recording no gains so far in the session and instead treading water. There may still be some nerves after last week’s plunge, with $20,000 looking particularly vulnerable once more. A break below could quickly see sentiment turn against crypto after an encouraging recovery since mid-June.

For a look at all of today’s economic events, check out our economic calendar:

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Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam