CPI and Sintra

Key Points

• European CPI will be the focus on the data side, with the market looking for a continued rise in the YoY number.
• The ECB’s Sintra Forum provides decent opportunity for speakers to respond to recent weak surveys.

European CPI

This week’s CPI readings will be released in the context of a shift in market attitude towards CB hawkishness. On the back of last week’s surveys, the market is now pricing far fewer hikes into the ECB cycle (as we had expected it might). Fears of recession are growing.  The weakening outlook points towards a risk that the ECB’s updated estimates for CPI at the end of their forecast horizon (due in September) may dip back down from the levels estimated in June. This would then lower the chance of a 50bp hike in September. While this week’s inflation readings for June may have little effect on the medium-term CPI outlook, that does not mean they won’t feed into market pricing of hawkishness. The market is looking for another rise in the YoY numbers for the Eurozone, France, Spain and Italy, and the YoY rate to remain stable in Germany.

With gas prices spiking higher on the Russian curtailing of gas via Nord Stream 1, the near-term energy inflation story may have some way to run yet. An upside surprise in inflation would probably see markets reverse some of the recent paring of hike prices. However, further out the energy story should be taken as a more dovish. Gas shortages, and the risk of demand-management in the continent would make a recession far, far more likely, which would curtail the ECB’s need and capacity to tighten policy.

ECB Sintra Forum

With the ECB Sintra Forum kicking off on Monday, the week will be well stocked with soundbites from the policy makers, as well as comments from Fed and BoE attendees. Right now, following Lagarde’s hawkish pivot, and the emergency meeting, expect ECB comments to focus on the separation of defragmentation from normalization. It will be interesting to also hear reactions to the survey data, and the inflation numbers.

G7 and NATO Summits

Elsewhere, Tuesday will see the beginning of the NATO summit in Madrid. The meeting takes place in the context of the defense alliance’s updated 2022 Strategic Concept.  A strong focus will likely be the treatment and strategy around shoring up the Baltic states in the face of rising Russian tensions, and the steps towards Finland and Sweden’s accession. A re-commitment to the 2% GDP defense spend target is likely to generate headlines on the fiscal side.

Meanwhile, the G7 meet over the weekend and into next week. Food and energy security will be high on the agenda. Comments from Italy’s President Mario Draghi on Friday suggested that the concept of an oil/energy price cap may also be discussed.

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Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank. He holds a BA in Economics from Durham University, and an MSc in Economics & Social History from the University of Oxford.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)