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Highlights (week 39/2022)

Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Speech by Christine Lagarde, President of the ECB, at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament

Brussels, 26 September 2022

The president of the ECB talked about the economic outlook for Europe, inflation hitting record levels and the monetary policy of the ECB at the hearing of the Committee on Economic and Monetary Affairs of the European Parliament. Regarding the economic outlook, she said: “The euro area economy grew by 0.8 per cent in the second quarter of 2022, mainly owing to strong consumer spending on services as the economy reopened. Economies with large tourism sectors benefited especially, as people traveled more over the summer. The still robust labor market also continued to support economic activity. Notwithstanding this, we expect activity to slow substantially in the coming quarters.

These developments have led to a downward revision of the latest staff projections for economic growth for the remainder of the current year and throughout 2023. Staff now expect the economy to grow by 3.1 per cent in 2022, 0.9 per cent in 2023 and 1.9 per cent in 2024.

Regarding momentary policy, Lagarde said:As things currently stand, we expect to raise interest rates further over the next several meetings to dampen demand and guard against the risk of a persistent upward shift in inflation expectations. We will regularly re-evaluate our policy path in light of incoming information and the evolving inflation outlook. Our future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.” Source: ECB

U.S stock markets

Stocks fell in on Friday after a negative week bringing the S&P 500 to a new 2022 low. The Dow Jones Industrial Average lost 500 points and settled at 28,725.51. The Nasdaq Composite was 1.51% lower, at 10,575.62. Meanwhile, the S&P 500 was down 1.51% on Friday, falling to 3,585.62. For September, the Dow lost 8.8%, the S&P 500 tumbled 9.3%, while Nasdaq lost 10.5%.

Bank of England intervention in Bond market

The Bank of England will not start selling gilts next week as previously planned and will temporarily buy long-dated bonds. This came as a response to the sharpest monthly rise of gilts (Yields on U.K. government bonds) since at least 1957 as investors fled British bonds following the new fiscal policy announcements.

“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy,” the Bank of England said.

Source: Bank of England

The FED and U.S treasury yields

Treasury yields closed higher on Friday, after a volatile week and a very negative one for stocks. The yield on the benchmark 10-year Treasury rose to 3.814%, while the 2-year Treasury yield rose to 4.264% (inverted yield curve as the longer maturities yields are lower than the shorter ones).

The Federal Reserve’s economic policy and potential future interest rate hikes combined with several hawkish comments from FED officials have been weighing on markets. On Thursday, San Francisco Fed President Mary Daly said she would be comfortable with interest rates rising as high as 5% in 2023. Fighting inflation remains the main priority for many FED officials.

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