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- A more balanced inflation outlook means the ECB will likely hold the deposit rate at 4% this week.
- Our EUR/SEK short indicator remains low, meaning it is not time to short the pair.
- Passing Beige Book peak pessimism suggests being long Antipodean vs major European FX.
- High-yielding cash has created a high bar for positive excess returns on equities – we prefer the former during inflationary periods.
ECB Preview: Pausing at 4%
We expect the ECB to hold the deposit rate at 4.0% this week, having hiked 25bps at the last meeting. We anticipated the previous hike, citing persistent upside risks to the inflation outlook.
Since then, the outlook has become much more balanced. Inflation reads have undershot ECB September forecasts, with wage intensive services inflation momentum dropping on a decline in accommodation prices (Charts 1 and 2). We do not expect the ECB will hike again before yearend, but with almost nothing priced in there is still value paying December 2023 ECB-dated OIS.
When to Short EUR/SEK
Clients have been asking since July, ‘should we turn short EUR/SEK?’ A valid question. After all, who would not want to benefit from the likely double-digit percentage reversal? However, as we noted then, EUR/SEK tends to collapse when prosperity has returned – when major central banks are cutting and the worst is behind us. Looking at the latest data, that is not expected until H2 2024! As such, our EUR/SEK short indicator remains favourably low (Chart 3).
Can Stocks Beat Cash at 5%?
An era of low yields on cash has prompted many equity investors to think in terms of absolute returns, rather than excess returns. Looking at absolute returns gives the illusion that equities have consistently delivered positive returns since the 1970s (Chart 4). However, looking at excess returns, almost half the decades were in the red (Chart 5). So when choosing between equities and cash, the question you really have to ask is this: can equities beat the 5% yielded by cash? We have long preferred cash in inflationary environments.
Beige Book Sentiment Suggests Long Antipodean vs Major Europe FX
We have published our latest Beige Book Sentiment Index. The headline index has increased for the third consecutive release, leaving peak pessimism behind. When this has happened in the past, the Antipodean currencies (AUD and NZD) tend to perform best. Meanwhile, the European majors (GBP, CHF and EUR) tend to perform worst (Chart 6).
Matthew Tibble is Commissioning Editor at Macro Hive. He has worked as an editorial consultant and freelance editor for companies such as RiskThinking.AI, JDI Research, and FutureScape248.
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