Economy

The ECB also cut a key subsidy to banks, but made no hint about plans to start winding down its bond holdings after hoovering up trillions of euros of debt issued by euro zone governments since 2015.MARKET REACTION: The euro dropped to a session low after the decision and was last down around 0.7% at $1.0005.Germany’s 10-year Bund was last down 2.5 basis points on the day at 2.09% versus 2.195% before the decision, while the pan-European STOXX 600 index remained lower and was last down 0.35%. COMMENTS:JACK ALLEN-REYNOLDS, SENIOR EUROPE ECONOMIST, CAPITAL ECONOMICS, LONDON:”The ECB is very likely to follow today’s 75 bps rate hike with further aggressive increases in the coming months, even if we are right that the forthcoming recession will be deeper than most expect. The decision to maintain the guidance on APP reinvestments, rather than announce the beginning of QT, is likely to be seen as slightly dovish. But with policymakers openly discussing QT, it wouldn’t be surprising if an announcement came at the next meeting in December.”PIET CHRISTIANSEN, CHIEF ANALYST, DANSKE BANK, COPENHAGEN “I think the market rally is due to indications of a slowing rate hike pace but also that we didn’t have any changes to the QT wording. The latter is probably the most surprising to me.”VIRAJ PATEL, GLOBAL MACRO STRATEGIST, VANDA RESEARCH, LONDON”The ECB is living on the edge of a dovish pivot. It’s clear that this is a central bank that wants to front-load rate hikes to control inflation. But they are also wary that they are not in control of a lot of external growth and market factors that can act as a circuit-breaker to the hiking cycle. “The knee-jerk reaction of lower swap rates and euro shows the slight dovish tilt to the statement. But worth remembering that this is still a central bank that will hike aggressively in the face of a recession – and the only thing that will stop them is if they see the whites of eyes of either (a) lower inflation or (b) a market crisis. If that doesn’t happen, then continue to expect front-loaded hikes from the ECB… and even another 75bps in Dec.” JEREMY BATSTONE-CARR, EUROPEAN STRATEGIST, RAYMOND JAMES:”The European Central Bank is between a rock and a hard place as it looks to control inflation without tanking the economy, and has decided that potentially tipping the region into a recession is a necessary evil in order to control spiralling inflation.”The euro zone is facing challenges that will be familiar to much of the rest of the world, with headline regional inflation running at a year-on-year rate of 10%, five times the target level. In response the ECB has raised its base interest rate by a further 0.75 points as it prioritises its core mandate of ensuring price stability. However, the attempt to cushion the blow to households and businesses from rising costs is likely to create issues elsewhere by imparting a marked downward pressure on economic activity by dramatically increasing the cost of borrowing.”CHRIS SCICLUNA, HEAD OF RESEARCH DIVISION, DAIWA CAPITAL MARKETS, LONDON:”They’ve dropped the reference to the next several meetings in the statement (they had previously said over next several meetings the Governing Council expected to raise interest rates further), which is probably an indication of a slower rate increase in December. “The TLTRO decision is a questionable one – the change in the terms and conditions after the events raises question marks about predictability on policy moving forwards. You would presume given the downturn they would want to use a tool like this in the future, and if they play around with the terms and conditions that might be harder, but we’ll want to look at the details later.”ALTAF KASSAM, EMEA HEAD OF INVESTMENT STRATEGY AND RESEARCH, STATE STREET GLOBAL ADVISORS, LONDON”This move shows the ECB continuing to respond to criticism of falling behind the curve, especially with respect to the Fed, and also to growing calls for the need to put a floor under the euro, in an effort to keep a lid on the extra imported (especially energy price) inflation its weakness has brought. “That said, this second 75 bps move takes the deposit rate into the middle of the 1-2% range for the neutral rate that ECB officials have cited, which should provide a natural point to slow down the pace of hiking given the high likelihood of a Q4 eurozone recession. As a result, we expect the ECB to slow its pace of rate rises, hiking ‘only’ another 50 bps in December – yielding a deposit rate of 2% by year-end.”BEN LAIDLER, MARKET STRATEGIST, ETORO, LONDON:”The TLTRO changes and the 75 bps hike was pretty much consensus so therefore priced by the market. “Focus will be on the press conference because with market expectations rising that the Fed will ease back on rate hikes… so people are going to be reading the tea leaves very carefully from what Lagarde says for the chances of a deceleration in rate hikes in the future. “I think we’ve probably got another 75 bps hike at the next meeting but markets are going to be looking very carefully at the guidance for what is coming after that.” CARSTEN BRZESKI, GLOBAL HEAD OF MACRO, ING, FRANKFURT:”In slightly more than three months, the ECB has now hiked interest rates by a total of 200 basis points. It’s the sharpest and most aggressive hiking cycle ever.”At the current juncture of a looming recession and high uncertainty, normalising monetary policy is one thing but moving into restrictive territory is another thing. With today’s rate hike, the ECB has come very close to the point at which normal could become restrictive.”NEIL BIRRELL, CHIEF INVESTMENT OFFICER, PREMIER MITON INVESTORS, GUILDFORD, UK:”The ECB increased rates to 1.5%, exactly as expected, and has said they are going higher, which shouldn’t be a surprise given that inflation is almost 10%. Central banks everywhere will be looking at the economic data and will make decisions accordingly. They won’t want to overdo it and damage their economies more than they have to. But, let’s be clear, inflation is the primary fear, not recession, and beating it is the most important battle to win. For now, it’s difficult to see what level the ECB will see peak rates reaching.”MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS, LONDON:”It (the rate decision) is broadly in line with expectations and the ECB is signalling more rate hikes will be required.”The more interesting thing for us is the balance sheet and where normalisation goes. There’s not a huge amount here but they are trying to make it less attractive for banks to borrow from the ECB and park it back at the ECB. So, they are pushing banks to pay their TLTRO loans early.”They have been pushing up rates since July and now they are saying they are ready to drain the liquidity out of the system.”MICHAEL HEWSON, CHIEF MARKET STRATEGIST, CMC MARKETS, LONDON:”At the end of the day there may be a softening of the tone from the ECB, certainly the sell-off in the euro would appear to suggest that they’re not going to go as aggressively over the course of the next few months.”I think the devil will be in the details. But certainly the tone of it suggests they’re may be getting nervous about over tightening and the initial reaction would appear to suggest that perhaps we may not get 75 basis points in December.” More

The U.S. economy posted its first period of positive growth for 2022 in the third quarter, at least temporarily easing inflation fears, the Bureau of Economic Analysis reported Thursday.
GDP, a sum of all the goods and services produced from July through September, increased at a 2.6% annualized pace for the period, against the Dow Jones estimate for 2.3%.

That reading follows consecutive negative quarters to start the year, meeting a commonly accepted definition of recession, though the National Bureau of Economic Research is generally considered the arbiter of downturns and expansions.
The growth came in large part due to a narrowing trade deficit, which economists expected and consider to be a one-off occurrence that won’t be repeated in future quarters. GDP gains also came from increases in consumer spending, nonresidential fixed investment and government spending.
Declines in residential fixed investment and private inventories offset the gains, the BEA said.
“Overall, while the 2.6% rebound in the third quarter more than reversed the decline in the first half of the year, we don’t expect this strength to be sustained,” wrote Paul Ashworth, chief North America economist at Capital Economics. “Exports will soon fade and domestic demand is getting crushed under the weight of higher interest rates. We expect the economy to enter a mild recession in the first half of next year.”
The report comes as policymakers fight a pitched battle against inflation, which is running around its highest levels in more than 40 years. Price surges have come due a number of factors, many related to the Covid pandemic but also pushed by unprecedented fiscal and monetary stimulus that is still working its way through the financial system.

The underlying picture from the BEA report showed an economy slowing in key areas, particularly consumer spending and private investment.
Consumer spending as measured through personal consumption expenditures increased at just a 1.4% pace in the quarter, down from 2% in Q2. Gross private domestic investment fell 8.5%, continuing a trend after falling 14.1% in the second quarter. On the plus side, exports rose 14.4% while imports dropped 6.9%.
There was some good news on the inflation front.
The chain-weighted price index, a cost-of-living measure that adjusts for consumer behavior, rose 4.1% for the quarter, well below the Dow Jones estimate for a 5.3% gain. Also, the personal consumption expenditures price index, a key inflation measure for the Federal Reserve, increased 4.2%, down sharply from 7.3% in the prior quarter.
Earlier this year, the Fed began a campaign of interest rate hikes aimed at taming inflation. Since March, the central bank has raised its benchmark borrowing rate by 3 percentage points, taking it to its highest level since just before the worst of the financial crisis.
Those increases are aimed at slowing the flow of money through the economy and taming a jobs market where openings outnumber available workers by nearly 2 to 1, a situation that has driven up wages and contributed to a wage-price spiral.
The Fed is widely accepted to approve a fourth consecutive 0.75 percentage point interest rate hike at its meeting next week, but then might slow the pace of increases afterward as officials take time to assess the impact of policy on economic conditions.
This is breaking news. Please check back here for updates.

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Gross Domestic Product
Note: Quarterly changes in gross domestic product, adjusted for inflationSource: Bureau of Economic AnalysisBy The New York TimesEconomic growth rebounded over the summer, the latest government data shows, but slowing consumer spending and a rapidly weakening housing market mean the report will do little to ease fears of a looming recession.Gross domestic product, adjusted for inflation, rose 0.6 percent in the third quarter, a 2.6 percent annual rate of growth, the Commerce Department said Thursday. It was the first increase after two consecutive quarterly contractions.But the third-quarter figures were skewed by the international trade component, which often exhibits big swings from one period to the next. Economists tend to focus on less volatile components, which have showed the recovery steadily losing momentum as the year has progressed.“Ignore the headline number — growth rates are slowing,” said Michael Gapen, chief U.S. economist for Bank of America. “It wouldn’t take much further slowing from here to tip the economy into a recession.”Consumer spending, the bedrock of the U.S. economy, rose just 0.4 percent in the third quarter, down from a 0.5 percent increase in the quarter before, as rapid inflation ate away at households’ spending power.The slowdown in spending will be welcome news for policymakers at the Federal Reserve, who have been trying to cool off consumer demand to tamp down inflation. The central bank has raised interest rates aggressively in recent months, and is expected to announce another big increase at its meeting next week.But forecasters and investors have become increasingly concerned that the Fed will go too far in its efforts to slow the economy and will end up causing a recession. Consumer spending has continued to increase despite higher interest rates and rising prices, but it is unclear how long that can last.“‘Borrowed time’ is how I would describe the consumer right now,” said Tim Quinlan, senior economist at Wells Fargo. “Credit card borrowing is up, saving is down, our costs are rising faster than our paychecks are.”The impact of rising interest rates is clear in the housing market, where home building and sales have both slowed sharply in recent months. The third quarter was in some sense a mirror image of the first quarter, when G.D.P. shrank but consumer spending was strong. In both cases, the swings were driven by international trade. Imports — which don’t count toward domestic production figures — soared early this year as the strong economic recovery led Americans to buy more goods from overseas. Exports slumped as the rest of the world recovered more slowly from the pandemic.Both trends have begun to reverse as American consumers have shifted more of their spending toward services and away from imported goods, and as foreign demand for American-made goods has recovered. Supply-chain disruptions have added to the volatility, leading to big swings in the data from quarter to quarter.Few economists expect the strong trade figures from the third quarter to continue, especially because the strong dollar will make American goods less attractive overseas. More

The Governing Council today decided to raise the three key ECB interest rates by 75 basis points.With this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation.The Governing Council took today’s decision, and expects to raise interest rates further, to ensure the timely return of inflation to its 2% medium-term inflation target.The Governing Council will base the future policy rate path on the evolving outlook for inflation and the economy, following its meeting-by-meeting approach.Inflation remains far too high and will stay above the target for an extended period.In September, euro area inflation reached 9.9%.In recent months, soaring energy and food prices, supply bottlenecks and the post-pandemic recovery in demand have led to a broadening of price pressures and an increase in inflation.The Governing Council’s monetary policy is aimed at reducing support for demand and guarding against the risk of a persistent upward shift in inflation expectations.The Governing Council also decided to change the terms and conditions of the third series of targeted longer-term refinancing operations (TLTRO III).During the acute phase of the pandemic, this instrument played a key role in countering downside risks to price stability.Today, in view of the unexpected and extraordinary rise in inflation, it needs to be recalibrated to ensure that it is consistent with the broader monetary policy normalisation process and to reinforce the transmission of policy rate increases to bank lending conditions.The Governing Council therefore decided to adjust the interest rates applicable to TLTRO III from 23 November 2022 and to offer banks additional voluntary early repayment dates.Finally, in order to align the remuneration of minimum reserves held by credit institutions with the Eurosystem more closely with money market conditions, the Governing Council decided to set the remuneration of minimum reserves at the ECB’s deposit facility rate.The details of the changes to the TLTRO III terms and conditions are described in a separate press release to be published at 15:45 CET.Another technical press release, detailing the change to the remuneration of minimum reserves, will also be published at 15:45 CET.Key ECB interest rates The Governing Council decided to raise the three key ECB interest rates by 75 basis points.Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 2.00%, 2.25% and 1.50% respectively, with effect from 2 November 2022.Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP) The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it started raising the key ECB interest rates and, in any case, for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance.As concerns the PEPP, the Governing Council intends to reinvest the principal payments from maturing securities purchased under the programme until at least the end of 2024.In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.The Governing Council will continue applying flexibility in reinvesting redemptions coming due in the PEPP portfolio, with a view to countering risks to the monetary policy transmission mechanism related to the pandemic.Refinancing operations The Governing Council decided to adjust the interest rates applicable to TLTRO III.From 23 November 2022 until the maturity date or early repayment date of each respective outstanding TLTRO III operation, the interest rate on TLTRO III operations will be indexed to the average applicable key ECB interest rates over this period.The Governing Council also decided to offer banks additional voluntary early repayment dates.In any case, the Governing Council will regularly assess how targeted lending operations are contributing to its monetary policy stance.*** The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation stabilises at its 2% target over the medium term.The Transmission Protection Instrument is available to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across all euro area countries, thus allowing the Governing Council to more effectively deliver on its price stability mandate.The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:45 CET today.(([email protected]; +49 69 7565 1244; Reuters Messaging: [email protected])) More

The US economy rebounded in the third quarter after contracting for the first six months of this year, as a narrowing trade deficit concealed weakening consumer demand.Gross domestic product increased by 2.6 per cent on an annualised basis between July and September, surpassing economists’ expectations and marking a sharp reversal from the 0.6 per cent drop in the second quarter of 2022 and the 1.6 per cent decline registered in the first three months of the year.The expansion in the third quarter was propelled by a narrowing of the trade deficit, as ebbing consumer demand damped imports while exports rose. That comes despite a widening of the deficit for goods in September as the strong US dollar weighed on exports. Consumer spending advanced just 1.4 per cent, far slower than the previous period, in a sign that the economy is beginning to slow.The data, released by the Department of Commerce on Thursday, effectively ends a debate that raged over the summer as to whether the US economy was already in a recession, but it did little to dispel fears that it will eventually tip into one given the aggressive steps the US central bank is taking to stamp out elevated inflation.Two consecutive quarters of shrinking GDP has long been considered a common criteria for a so-called “technical recession”. However, top policymakers in the Biden administration and at the Federal Reserve pushed back forcefully on that framing, citing ample evidence that the economy was still on firm footing.The official arbiters of a recession, a group of economists at the National Bureau of Economic Research, characterises one as a “significant decline in economic activity that is spread across the economy and lasts more than a few months”. They typically look at a wide range of metrics including monthly jobs growth, consumer spending on goods and services, and industrial production.The Fed is poised early next month to deliver its fourth consecutive 0.75 percentage point interest rate increase, which will lift its benchmark policy rate to a new target range of 3.75 per cent to 4 per cent. As recently as March, the federal funds rate hovered near zero, making this tightening campaign one of the most aggressive in the US central bank’s history.

While the Fed may soon consider slowing the pace of its rate rises, potentially as soon as December, it is not expected to pivot altogether away from tight monetary policy. As of last month, most officials thought the fed funds rate would peak at 4.6 per cent, but now investors expect it to close in on 5 per cent next year.Given how large an impact the Fed’s actions are expected to have on growth and the labour market, most economists now expect the unemployment rate to rise materially from its current level of 3.5 per cent and for the economy to tip into a recession next year.Top officials in the Biden administration maintain that the US economy is strong enough to avoid that outcome, citing the resilience of the labour market, but even Jay Powell, the Fed chair, has acknowledged the odds have risen.“No one knows whether this process will lead to a recession or if so, how significant that recession would be,” he said at his last press conference in September. More

The ECB has been undoing years of aggressive stimulus in a matter of months after being blindsided by a sudden surge in prices – the result of higher energy costs caused by Russia’s invasion of Ukraine and the economy’s uneven reopening after the COVID-19 pandemic. The central bank of the 19 countries that share the euro raised the interest rate it pays on bank deposits by 75 basis points, taking it to the highest level since 2009 at 1.5%. “The Governing Council took today’s decision, and expects to raise interest rates further, to ensure the timely return of inflation to…2%,” the ECB said.But the ECB repeated plans to keep reinvesting proceeds from the 3.3-billion-euro pile of bonds it bought under its Asset Purchase Programme (APP) in the last eight years, when it thought inflation was going to stay low. “The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time,” the ECB said.Finally, the ECB changed the terms of its Longer-Term Refinancing Operations to encourage banks to repay those multi-year loans early. With Thursday’s decision, the ECB also increased the rate on its Main Refinancing Operation, a weekly cash auction that banks have barely tapped for years, to 2.0% from 1.25% and that on its daily Marginal Lending Facility to 2.25% from 1.5%. ECB President Christine Lagarde will explain the policy decisions in a news conference at 1245 GMT. More

Investing.com — The European Central Bank raised its key interest rates by another 75 basis points and said it plans to hike further in its battle to bring inflation down from a 40-year high. “With this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation,” the ECB said in a statement detailing its decisions.As such, the key deposit rate – which sets the floor for Eurozone money markets – will rise to 1.50%, while the refinancing rate rises to 2.00% and the marginal lending rate rises to 2.25%.The euro weakened slightly in response as markets zeroed in on a subtle change in its language that suggested it may only hike once more before ending its tightening cycle. That would represent a slightly more dovish stance from the Frankfurt-based central bank, given that its President Christine Lagarde had guided for three or four hikes at her last press conference. Gilles Moec, an economist with Axa in London, said that the change in wording “does not mean they won’t hike in 2023, but at least opens the door to a proper debate on this.”Eurozone bond yields also moved a shade lower, with two-year yields on German, French and Italian bonds falling by between 6 and 8 basis points. Longer-dated bonds, which are less sensitive to changes in near-term rate expectations, edged down by less.The change in stance – if it materializes – would in turn reflect the sharp deterioration in the Eurozone economy over the summer caused by the economic fallout from the war in Ukraine. The suspension of Russian gas shipments, in particular, has had a crippling effect on the energy-intensive parts of the Eurozone’s industrial base, especially Germany.The bank also said it will tweak the conditions of some outstanding operations, known as TLTRO III, in order to tighten financial conditions further. The operation had extended large-scale, ultra-cheap loans at the height of the pandemic. Developments since then have made it redundant and arguably added to the pressures that have driven annual Eurozone inflation to 9.9%”In view of the unexpected and extraordinary rise in inflation, it needs to be recalibrated to ensure that it is consistent with the broader monetary policy normalisation process and to reinforce the transmission of policy rate increases to bank lending conditions,” the ECB said.The conditions on the TLTRO III loans had allowed banks to borrow from the ECB at rates as low as 50 basis points below the deposit rate, depending on how much of that preferential funding they passed on to households and companies. As the ECB has raised rates, the incentive to ‘park’ those funds back at the ECB’s deposit facility has increased, resulting in a de facto subsidy to Eurozone banks running into billions of euros.That subsidy has been evident in a number of Eurozone banks’ earnings reports in the last week. A number of reports had cited ECB officials as fretting over the poor optics of such a subsidy regime at a time when households are struggling with surging bills for energy, food and other essentials.The ECB will publish the new terms of the TLTRO III operations at 09:45 ET (13:45 GMT). More