Chart of the Day - all about Europe.
As we scan the economic data & the news feed, the stories today are all about Europe.
First, we started to get some CPI reports from some EU members for the month. These will start to come out a little bit every day but the highlights were Lithuania at 22.4%, Latvia at 21.5% and Hungary at 15.6% (better than expected!). We will get more reports & those from the bigger countries. However, the forecast for the EU region for this month is 9.1% (in orange). This is in danger of being exceeded & the EU energy/power price story is only part of it (that story may have seen its peak to be honest). We think the US has an inflation problem but Europe has said 'hold my beer'.

The ECB responded today with the largest rate hike in its young history. It moved 75 bps to get to 1.25%. Unlike the Fed which has a dual mandate of jobs & inflation, the ECB has a lone mandate - inflation. It is failing miserably on this front. You can see ECB rates in blue. They have a long, long way to go to have any meaningful sort of effect. However, you can also see that since 2016, the ECB has quietly (or not) really ignored its mandate. Even when CPI reached or exceeded its 2% goal, the ECB did not move rates. The most it did was stop growing its balance sheet, for a time.

The balance sheet is in light blue. It has paused for now but there should be no expectations it gets reduced. It has been on a steady move higher for 15 years. Does it contribute to CPI? Maybe. Not entirely clear in my mind. Why? In my opinon, the ECB has its quiet other mandate in assuring stability in the region, something the EU politicians are spineless to do. The ECB was growing its balance sheet to bail out banks in that 2014-2017 period. This was something the Fed did in the immediate GFC aftermath. Now it is growing its balance sheet to protect the peripheral countries. Italy is the first name that comes to mind. This was something the ECB did in the GFC aftermath before, eschewing the banks.

As we have seen the steady climb of the balance sheet, as the ECB has had to bail out everyone, we have seen the EUR trend lower. I am old enough to remember when Giselle wanted to only get paid in EUR because it was going to replace the Dollar. It has lost 60% of its value on a relative basis since the GFC. Coincident with an increase in balance sheet. Which doesn't seem to be stopping.

So there are two forces at play. The ECB will keep hiking and try (but fail) to slow inflation. That is one movie. The ECB will also grow its balance sheet to bail out the periphery. The stories today had hope an ECB rate hike would stop the fall in the EUR. I think those writers are watching the wrong game.

Stay Vigilant

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