Euro: Second hike seen as energy clouds outlook – Societe Generale
Societe Generale’s Kenneth Broux expects a second 25bp ECB depo rate hike, stressing that wage dynamics and updated staff forecasts will determine how far tightening goes. The bank notes higher Oil and natural gas prices, warns of stagflation risks if energy and food shocks persist, and sees a higher inflation plateau possibly requiring a higher terminal rate than currently priced.
Hawkish hike versus energy risks
"A second 25bp increase in the depo rate by the ECB today is a foregone conclusion but key to assessing how far this pre-emptive tightening into restrictive territory may go surrounds the outlook of wages."
"How does President Lagarde frame the outlook, are the staff forecast projections revised up in light of higher energy prices over the summer and greater optimism in the growth backdrop."
"This was June: “the current energy shock is expected to have a limited upward effect on wage growth, with weaker demand conditions and the less broad-based nature of the shock compared with the 2021-24 episode helping to contain second-round effects.” Oil prices crossed $100 and natural gas €75 this week but may not dash optimism that growth prospects have brightened, though not uniformly across the regions."
"Looking though the rosier near-term growth profile, the stagflationary consequences cannot be underestimated further out if the whirlwind of higher energy and food prices lasts and causes households to tighten their belts. Headline inflation was previously forecast by the ECB to rise to 3.4% in 3Q (3.3% in August) and to remain elevated until early 2027."
"A higher plateau is now likely and may require a higher terminal rate to bring inflation back to target in 2028. The forward curve is currently pricing in a peak for the depo rate of just over 3% (2y2y), i.e. another two increases after today. Our economists pencil in +25bp to 2.75% in December. The 10y Bund yield, resolutely tracking natural gas since July, is looking increasingly overdone relative to inflation expectations. For EUR/USD, the large concentration of option expiries should help pin the single currency close to the 200dma."
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