Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.How will the ECB respond to bond market turmoil?The European Central Bank will meet in Athens this week as borrowing costs for eurozone governments reach their highest level since a debt crisis threatened to destroy the single currency more than a decade ago.The ECB was already widely considered likely to leave interest rates unchanged at Thursday’s meeting, halting what has been an unprecedented tightening of monetary policy to tackle the biggest surge in European inflation for a generation.The recent bond market sell-off, driven by stronger than expected US economic data and a belief that interest rates will stay higher for longer, has reinforced expectations of an ECB pause because it tightens financial conditions by an extra few notches.As ECB policymakers take a break from raising rates — at least for now — they are turning their attention to other matters, such as the €3.7tn of excess liquidity the central bank holds on deposit from commercial banks, an increasingly expensive liability given how much rates have risen.Several ideas have been floated to address this, from an earlier start to the process of shrinking the central bank’s balance sheet by reducing the size of its bond portfolio, to raising the minimum deposit requirements of commercial banks on which they receive no interest.However, given the turmoil in bond markets, some ECB governing council members have told the Financial Times this month that the former idea is unwise while the latter is unnecessary to bring inflation down to target and should be left to a wider operational framework review next year.Peter Schaffrik, global macro strategist at RBC Capital Markets, said the ECB was “unlikely to make changes to any of these measures at its meeting next week” — including the interest it pays on government deposits — but he is watching for any clues on its “future intentions”. Martin ArnoldDid US economic growth pick up in the third quarter? US economy growth is expected to have accelerated in the third quarter, despite the impact of the Federal Reserve’s aggressive interest rate raising campaign. The Bureau of Economic Analysis on Thursday is forecast to report that US gross domestic product grew at an annualised pace of 4.1 per cent in the three months to September, according to a Reuters poll of economists. That would mark a sharp increase from the 2.1 per cent in the second quarter.Economists and analysts have been betting for months that the Fed’s interest rate increases — which lifted the central bank’s key rate from near-zero to a range of 5.25 to 5 per cent in less than two years — would soon begin to curb growth. There has been little evidence of that so far, however, despite a slowdown in some segments of the economy such as the housing sector. Data from the commerce department this week showed that September retail sales data was far stronger than expected, increasing by 0.7 per cent. That is expected to have fed through to higher GDP, analysts say. Retail sales and recent higher-than-expected inflation data “has led us to raise our forecast for third-quarter real GDP growth to 5 per cent versus the second quarter’s 2.1 per cent”, wrote Tiffany Wilding, an economist at Pimco. “This fast pace underscores strength in the US economy, including in the labour market, reinforcing the challenge policymakers face as they look to cool the economy in their fight against sticky inflation.” Kate DuguidHow strong is the UK labour market?Investors will look at incoming UK jobs data to understand the extent of the impact of higher interest rates on the economy and price pressures. On Tuesday, the Office for National Statistics will publish employment figures after the publication was postponed last week on the back of quality concerns following diving participation rates in their survey.Economists polled by Reuters forecast that the unemployment rate will remain at its 22-month high of 4.3 per cent in the three months to August. Together with an easing in wage growth revealed by data published last week, the figure should reinforce the view that the tightness of the labour market — which has added to inflationary pressures — is waning.However, the Bank of England is putting less weight on the ONS’s earnings and labour market figures. At September’s meeting, BoE policymakers noted that alternative measures of pay were running at levels below the official data, and this was one factor that resulted in its narrow decision not to raise its benchmark interest rate from 5.25 per cent.The central could also be wary of business activity data for October which is also published on Tuesday. September’s preliminary figures suggested the UK was entering a deep recession, only to be revised to much healthier levels in the final reading. “[The figures] may now be taken with a pinch of salt,” said Sandra Horsfield, economist at Investec. She added that the BoE’s decision to keep rates unchanged in September was by a razor-thin majority of five to four and “one has to question whether the same decision would have been made had there not been such a gloomy flash services PMI estimate.”Horsfield expects the composite purchasing managers’ index to fall marginally to 48.3 in October, driven by a sharper slowdown in services activity as higher mortgage payments and rental costs hits consumer demand. Manufacturing is also expected to remain in contraction. Valentina Romei More
