The pressure now turns to the Euro area and the ECB

So far this week the financial market pressure has been on the UK. But whilst the UK has its own issues which have been exacerbated by yet another regulatory failure ( the FCA was fast asleep as pensions funds got over leveraged), many of the pressures apply elsewhere. One is in the news this morning as we see releases from various German states.

German CPI North Rhine Westphalia (M/M) Aug: 1.8% (prev 0.3%) -CPI North Rhine Westphalia (Y/Y) Aug: 10.1% (prev 8.1%) ( @LiveSquawk )

So 10.1% in North Rhine Westphalia which was followed by this.

German CPI Bavaria (M/M) Sep: 2.2% (prev 0.4%) – German CPI Bavaria (Y/Y) Sep: 10.8% (prev 7.9%) ( @LiveSquawk)

Some of the other states were just shy of double digits but a monthly rise of 2% looks to be on the cards when the national figures are released later. Not on the scale of the Weimar moves in the 1920s but must have some nervous.

If you are worried about inflation then the news from Italy will not calm you down.

In August 2022, industry producer prices increased by 2.8% on a monthly basis and by 40.1% on an annual basis (it was + 36.9% in July).

On the domestic market, prices grew by 3.5% compared to July and by 50.5% on an annual basis (it was + 45.9% in July). Net of the energy sector, the economic growth is modest (+ 0.6%) and the trend is much less intense (+ 13.0%).

I will come back to the detail later because it is significant. But my main thrust at this point is interest-rates because if you are looking at inflation in the double-digits then someone from the past would think of the numbers below as some sort of parody.

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 1.25%, 1.50% and 0.75% respectively, with effect from 14 September 2022.

They simply would not believe that the main interest-rate was 0.75% and that the central bank was claiming to.

As the current drivers of inflation fade over time and the normalisation of monetary policy works its way through to the economy and price-setting, inflation will come down.

They would think it was still pumping things up especially in Italy where it is still buying government bonds. We can look ahead via a couple of ECB speeches and we can start with the man planning for -3% interest-rates. Remember Fabio Panetta?

A well-designed digital euro would bring benefits for everyone

It seems he is still at the same game. We can switch from Brussels to Frankfurt where Vice-President de Guindos seems to be having a go at comedy.

Subsequently, to combat steadily rising inflation, in December 2021 we started normalising our monetary policy by announcing the end of our asset purchases, in tandem with targeted fiscal measures aimed at mitigating the hardship of soaring prices for the most vulnerable households and firms.

Curious as I thought inflation was only a “hump” back then according to the ECB. Anyway yesterday Executive Board member Elderson assured us that dealing with climate change would help.

Not only have we started policy rate normalisation with an unprecedented 125 basis point increase in our rates over the last two Governing Council meetings, we have also released details of how we aim to decarbonise our corporate bond holdings on a path aligned with the goals of the Paris Agreement. As of next Monday, we will start tilting our corporate bond purchases towards issuers with a better climate performance.

Anyway the ECB watchers once they have dug their way through a lot of ECB policy on its present main priority which is decarbonising corporate bonds think that it will also do this.

We’ve had a lot of ECB rate hike guidance in recent days, I’m trying to summarise it here but the upshot is that we’re strongly guided towards a 75bp move in October by the hawks. ( @AntoineBouvet2)


The other problem is the way that the economy is being hit hard. There was a summer bounce for the countries which benefit from the return of tourism but now look at the prices industry in Italy is facing.

the most marked concern coke and refined petroleum products (+ 33.1% domestic market, + 8.2% euro area, + 31.1% non-euro area), chemical products (+ 24.7% domestic market, +25, 6% euro area, + 30.0% non-euro area), wood, paper and printing industry (+ 18.4% domestic market, + 26.2% euro area, + 19.3% non-euro area) and articles in rubber and plastic materials (+ 19.1% domestic market, + 14.1% euro area, + 15.8% non-euro area).

The rise in costs we are seeing will cause more and more shutdowns. There is a general trend across Europe.

#France another industry hit >> Arc International glass idles 4 0f nine furnaces; the others will be switched from natural gas to diesel.

This morning Faz is warning about the world’s second largest cement manufacturer.

The building materials group Heidelberg Cement has warned of plant closures in Germany. If the price of electricity does not fall permanently, the company will have to take one or the other plant completely off the grid, and it has prepared for that, said CEO Dominik vonAINTH.

I note it comes with something of a hint.

“In Germany and Europe there are real question marks behind the locations.”

We can also look at Germany vis what the Financial Times calls its “leading economic institute”

The institutes said the country’s gross domestic product would expand by 1.4 per cent this year, contract by 0.4 per cent in 2023 and grow by 1.9 per cent in 2024.

Actually that is not to bad until you see this.

 Just five months ago, the institutes were predicting growth of 2.7 per cent this year and 3.1 per cent in 2023.

So actually they have been forced to spot the slowdown but cannot move the numbers more negative without thoroughly embarrassing their previous effort.

 Just five months ago, the institutes were predicting growth of 2.7 per cent this year and 3.1 per cent in 2023.

So our valiant forecasters are not actually much good at forecasting. Oh well! As Fleetwood Mac would say. After all what is 160 billion between friends?

“This revision mainly reflects the extent of the energy crisis,” they said in a joint statement, adding that economic output in 2022 and 2023 would be €160bn lower than expected in the spring.

Tucked way in this is a further problem for the ECB because they have told us they have been dealing with inflation since December 2021 and yet the Ifo are suggesting it will be worse next year.

They said inflation would rise to 8.8 per cent next year, slightly higher than this year’s level of 8.4 per cent, though it would decline to 2.2 per cent in 2024.


I have left a couple of major issues for last. The energy situation remains quite a mess.

NEW: German network regulator says recent consumption of gas by households is too high to remain sustainable, gas savings of 20% are necessary to avoid an emergency situation. ( @CNBCJulianna )

No I do not know about you but if I was on a continent facing issues like this then below would be off my list of to do items.

This is Doel Nuclear Power Station near Antwerp, Belgium. I took this picture from the Netherlands on 9/22 – the day before the 1,000 MW #Doel3 reactor was taken offline in the midst of an energy crisis. The only problem with this plant is that politicians didn’t want it. (@TiemannAmelia )

I believe that to be 10% of the electricity supply for Belgium or rather it was. That may explain why the UK was exporting 1 GW of electricity to Belgium this morning. I would not be relying on us this winter if I was them. Added to all of this is the debacle with the Nord Stream pipelines which were being discussed in the comments section yesterday.

Finally there was the issue yesterday about UK pension funds and their problems due to LDI leveraging. It occurs to me if UK pension funds hit trouble with yields in the range 0%-0,5% ( we briefly had the occassional negative one) what trouble were Euro area ones having with negative bond yields? The largest by scale was Germany where even the ten-year went negative. But remember even some yields in Italy went negative. How did its pension funds cope?



35 thoughts on “The pressure now turns to the Euro area and the ECB

  1. Just got a gut feeling we are heading for a major world financial crisis as shaun commented about the bonds issue reading some of the press comments the worry was the contagion would have spread to Europe and the US.

    The £ has still been quite volotile today weak mid morning and pulled up further but I expect more weakness the comming days and weeks, the market is awaiting the BOE to reduce rates and I cannot see the market waiting until November.

    Stocks fell quite heavy in UK today NEXT warned on profits and the share price fell circa 10% and both BooHoo, and Sainsburys share price heading towards short term low and M&S doing the same having broken the £ level on the downside.

    Althogh UK stocks have pulled back from morning lows they are in bear territory and other markets doing the same. Inflation is going to wipe out company profits.

    Truss raised her head this morning after the media said she had vanished but as expected she is not changing course.

    Watching Peston last night interviewing some financial guy in the US he said part the problem was the BOE keep lagging interest rates and warned the gas prices would make the UK poorer whatever they do. Lets face it any subsidies will have to be paid for by the tax payer in due course there is no free lunch.

    • LONDON (Reuters) – Sterling fell as much as 1% on Thursday after British Prime Minister Liz Truss defended economic plans that have triggered chaos in the country’s markets.

      Truss said big tax cuts were the right path for Britain and refused to consider reversing the so-called “mini budget” laid out last week.

      The pound was last down 0.88% to $1.0791 after hitting a session low of $1.0764. The euro was up 0.18% against sterling at 89.54 pence.

      Sterling crashed to a record low against the dollar of $1.0327 on Monday after new finance minister Kwasi Kwarteng unveiled plans to slash taxes, particularly for the rich, and jack up borrowing.

      The mini budget also wreaked havoc in the UK government bond market, forcing the Bank of England to intervene on Wednesday.

      The BoE said it would buy around 65 billion pounds of long-dated government bonds after seeing “dysfunction” in the market.

      Sterling bounced on Wednesday to close at $1.0877 as investors digested the BoE’s plans.

      However, it resumed its long-running slide on Thursday as Truss came out to defend her government’s policies.

      “We are facing difficult economic times,” she said on local BBC radio. “I don’t deny this. This is a global problem. But what is absolutely right is the UK government has stepped in and acted at this difficult time.”

      Jonas Goltermann, senior markets economist at consultancy Capital Economics, said both dollar strength and fears about the British economy were hitting the pound on Thursday.

      “I don’t think (the BoE’s intervention) is going to be a long-term boost for sterling, although it might prevent an extreme downturn,” he said.

      Goltermann said further falls in sterling are probable. He said the BoE is likely to disappoint traders, who are expecting it to hike interest rates to 6% by spring next year from 2.25% currently.

        • The £ goes up one way circa 1.77% and the footsie 100 goes the other way down 1.77% maybe.

          Speculators moving in and out of the currencies on any news they think will affect the currencies.

          Some would say the £ was oversold others would say the statements by the BOE and GOV has tried to calm the currency markets.

          However if the market was that convinced that the budget was going to increase growth you wouldn’t have a sudden exit from some of our biggest retailers. Here are some examples :

          Sainsburys down 5.5% a 7 year low ! Yes seven years I am dyslexic but got that right ! Lost billions of pounds off its market cap in last 7 years.

          ASOS down 6.6% today alone lost billions off its market cap and trading almost on its all time lows.

          BooHoo down 3.4% trading near its all time lows lost over 80% off it’s all time highs and billions off it’s market cap since IPO.

          Joules down 32% today alone in deep financial trouble

          Marks Spencer down 7.9% lost billions in its market cap the last 12 months and going towards it’s all time lows.

          OCADO down 10.2% lost billions off it’s marker cap the last 12 months

          Norcross down 8.2% today. (Kitchen Bathroom Suppliers)

          NEXT down 12.2%

          Resteraunt Group down 10%

          HUT group down 10.4% trading on all time lows and lost billions off it’s market cap the last 12 months.

          Most retail stocks charts look like ski slopes going down and down.

          If the market had any faith in the Chancellors budget going to create growth you wouldnt see so many retail stocks falling as you have. The fact is the GOV borrowing is going to push up interest rates and Rishi Sunak warned that Liz Truss plan would do exactly that he was going to be more financialy prudent he didn’t want to create more debt.

          So there you have it we aren’t out of the woods yet the GOV is not for turning as Margaret Thatcher said but maybe not in those precise terms.

          • Sorry for off topic but the UK in a crisis.

            Sir Charles Walker Cons PM lambasts the budget in an interview on chanell 4 as You Gov shows Labour in 33 points lead. He said you cannot blame the markets for not understanding the implications on GOV borrowing on the budget they should not have announced the budget without proper forecasts.

            In the meantime Bloomberg warns British retail face “mortgage time bomb”

            (Bloomberg) —

            “UK retailers are facing a “mortgage time bomb,” with rising interest rates set to have twice the impact on consumer finances as the recent surge in utility bills, according to Deutsche Bank analyst.

            A “significant” increase in the cost of servicing home loans will reduce disposable incomes by about 5% in 2023, Matt Garland wrote in a note Thursday, adding to pressure on consumers already struggling to contend with soaring inflation.

            The prediction added to investor jitters on the day that bellwether Next Plc (LON:NXT) issued its second profit warning this year and Sweden’s Hennes & Mauritz AB (ST:HMb) reported an 86% slump in third-quarter earnings. Retail stocks tumbled anew, with Next sliding as much as 10% and H&M as much as 7.2%, dragging the Stoxx 600 Retail Index to its lowest level in more than 10 years.

            The problems don’t end there, according to Garland. He estimates that Britain’s retailers will need to raise prices by 15% to offset the impact to profitability from sterling weakness over the next two years.”

            So despite some things dropping out of the Inflation index retailers face more and more inflation, this will become a snowball effect higher inflation will mean ever higher mortgage costs and push many retailers to the wall.

            I remember Justin King warning we amy see a major supermarket hit the wall and with a good percentage of the population now going to both ALDI and LIDL some retailers face a bleak future.

            Todays interviews with Liz Truss and Kwarting not gone down at all well and have failed to instill confidence in the stock market.

          • Peter,
            I do not think that the £50 billion of tax cuts is the main cause of this drop in the stock market.
            Look at the other stock markets, the Dow Jones is down more today then the Footsie, the other European markets are also down a similar amount to the Footsie. Ask yourself has a relatively small drop in taxation in the UK (about back to last year’s figures) caused all this?
            I believe we need to look elsewhere for answers and my guess is that it is made up of three parts.
            1) The very low IRs since the 2008 crash.
            2) the lockdowns caused by the response to Covid, combined with money printing.
            3) Russia’s invasion of Ukraine and the subsequent realisation that net zero does not provide an affordable and reliable energy / electricity supply.
            4) All the central banks said the inflation rises were temporary and did nothing about IRs
            5) The sudden realisation by the central banks that they have to rise IRs, led by the Fed.

            Yes we are in a mess with all the points I mentioned coming to a head at a similar time, but Liz Truss returning taxation levels to last year is not the cause.

    • The £ may have stabalised by the BOE intervention but Liz Truss interviews today not gone down too well. UK shares are being hammered today I have never seen a day where most retailers have lost so much in one day.

      Seems Kwarting has also been speaking about the budget but like Truss sticking to their plans stating he is helping people with their energy bills.

      However anyone who owns stocks and bear in mind pension funds do has seen the value of those stocks taken a big hit lately and there could be worse to come.

      The stock market does not believe for one minute her tax cuts are going to help the economy if so you would see retail stocks on the rise and the opposite is happening many retail stocks on new lows in fact as I posted a few days ago some supermarkets could be heading for serious defaults.

      I for one don’t believe the budget trickle down economics will work it takes time to build a business and very few people will invest to expand when the economy is to retract.

      Billions have been lost in the last few days on the stock market alone on just a small fraction of stocks. The footsie 250 fallen the worst.

      • Joules the mid market fashion retailer faces CVA as it’s shares collapse and NEXT walks away from a cash injection.

        Joules was in trouble prior to the budget and with household costs go up there will be less money spent on clothes. 40% of mortgages have now been pulled the market has given a thumbs down to Truss tax cuts for the rich

        Liz Truss said she had to act as fuel bills were going to go to £6,000 but avoids any questions on mortgage market crisis which she has caused in one fell swoop.

        Instead of growing the economy higher interest rates are bound to force many business to the wall and slow down expansion, Joules won’t be the only retailer in deep trouble.

      • nick,

        You are correct other stock markets are falling and there are numerous causes as you have set out, the war in Ukraine and particularly inflation in Europe which is bad for stocks because it will push up interest rates.

        However the budget has added to the turmoil imo and will push up mortgage rates in the UK as the market thinks that not only is the budget inflationary but it will push up GOV debt and that combination will increase inflation.

        As I set out in my post above UK retail stocks have taken a pounding and there will be retail stocks in both the US and Europe as well as other markets fallen heavier than their own markets.

        The UK budget has just added to market turmoil imo and because countries trade with one another more than ever what happens in one country tends to affect another country,

        Had the BOE not intervened buying up gilts other there was a worry the contagion would have spread but the markets are full of contagion at the moment due to inflation getting imbedded. I just happen to think the budget made things worse for the UK stock market as any gains have been wiped out this year.

        Danny Blanchflower been quiet on Europe’s inflation figures here is was predicting it was only transitory and inflation would fall away quickly but it doesn’t appear to be doing so.

        You cannot beat the money markets if they don’t like something they will short it down and “The Masters of the Universe” are still around. Mark Carney warned there would be another financial crisis at some time and we may be facing one now.

        There has been an asset bubble develop around the world and high interest rates may burst the baloon. I suspect various GOV will do everything to prevent a collapse but all things being equal you cannot keep printing your way out of trouble.

        • nick

          Billionaire investor Druckenmiller believes Fed’s monetary tightening will push the economy into recession in 2023.

          Reading down the article and he believes all the money creating has caused an asset bubble and no one can deny that or in fact the same thing has occured around the world. House prices have risen to unsustainable levels and there needs to be a correction, rising inflation and now rising interest rates will now cause that correction.

          Most the ecomomies around the world in the mire imo and we will see more volotilitry in the days and weeks to come.

          forbin would be loving all this lets hope his cruise is in less choppy waters.

  2. Hi Shaun, I don’t think Euro Area pension funds had Gordon Brown driving a nail in their coffin like he did with U.K. funds when he abolished tax relief on their dividends. As always I could be wrong; but as I remember it, around 25 years ago, it cost the funds about £250 billion; and U.K. funds are, I think, obliged to hold gilts. But I’m very unsure of the rules.
    All in all final salary/defined benefit schemes generally are in a sorry state.

  3. Needing to cut domestic gas usage by 20% coming into winter isn’t “an emergency situation”?

    What planet do these people live on? And who do they think they’re fooling?

  4. The main concern in both Europe and the UK is inflation getting imbedded, and as for forecasting under fhe current crisis it is almost impossible:

    “We can also look at Germany vis what the Financial Times calls its “leading economic institute”

    The institutes said the country’s gross domestic product would expand by 1.4 per cent this year, contract by 0.4 per cent in 2023 and grow by 1.9 per cent in 2024.”

    I can accept analysts predicting 6 months ahead but a year and two years ahead is impossible there are too many variables at play.

    We saw that with covid and then the war in Ukraine both shattered anaysts forecasts with both GDP and inflation.

    You can only predict about 6 months imo any longer is pure speculation.

  5. “NEW: German network regulator says recent consumption of gas by households is too high to remain sustainable, gas savings of 20% are necessary to avoid an emergency situation.”

    This is why Nordstream has been sabotaged by USA.
    There were cracks appearing in the western alliance, with Russian gas being a strong temptation to break ranks & look after your own people, rather than the evil cabal.
    That temptation no longer exists.

    This move is such a strategic disadvantage, that anyone who tells you that Russia did it, is either an evil liar, or a gullible fool.

  6. Hello Shaun
    if as you say “( the FCA was fast asleep as pensions funds got over leveraged)”, then in the forward planning department of the FCA a run on the pound is a black Swan event?

    • Hi PeterH

      The FCA has a forward planning department? It sounds like a easy job. Do nothing and say “nobody could have expected it” should something go wrong.

      The phrase Black Swan event seems to have gone out of use. Maybe we have just had too many!


    “However, a former Polish Defense Minister Radek Sikorski attributed the sabotage to the US by saying in a Tweet “Thank you, USA.”

    “Technically, Russia sabotaging the pipelines in the Baltic Sea appears to be not feasible,” he said. As undersea activities in the Baltic Sea have been dominated by NATO members or allies since the Cold War with monitoring devices toward then Soviet Union and now Russia, how could Moscow explode the pipelines easily, which in fact is not a favorable thing for itself, Shen asked. “

    • Hi therrawbuzzin

      There is a lot going on. There is a site linked to the Royal Navy on twitter and I have suggested to them that what defences we have it seems time to deploy them.

  8. shaun, Proffesor Minford thinks (GB news) bank rate will only go to 3% as money supply is already tight and the BOE will take it’s time to increase rates.

    Liz Truss evidently quoted Liz Truss in her interview earlier. I know a few people on here don’t think Minford has any credibility I don’t know what you think?

    I think 3% BOE rates far off the mark particularly looking at the way the FED has increased rates.

      • Kwarteng

        “We stopped consumer spend collapse” LOL

        The guys got myopia retail stocks have collapsed in the UK and many are on their all time lows market caps evaporated. Retail doesn’t believe a word he spouts out of his mouth.

  9. Hi Shaun,

    I don’t know where he gets his 3% because we are lagging behind the US by a few % and we should have been nearer 3% the last time the BOE met. The only way I can see 3% if inflation falls off a cliff within the next few months which maybe Blanchflower thinks would happen as he was quitimng the fall in containere costs and other commodities. In actual fact I thought inflation would fall quite quickly from Autumn on but not sure now as the fall in the £ put paid to that. Now the £ may start to recover from here but I am not so sure about that.

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