The ECB hikes rates again. Is the end of the tightening cycle near?

September 19th 2023

Executive summary:

• U.S. consumer prices ticked up during August
• The European Central Bank raised rates to 4% 
• Economic struggles are weighing on Chinese equities 

U.S. core inflation rises in August, but September rate hike unlikely

Antal-Gilbert opened the conversation by noting that the headline U.S. CPI for August came in slightly higher than anticipated, rising 0.6% from July. Cousley added that the core CPI – which excludes the often-volatile food and energy sectors – also picked up a bit more than expected, increasing at a monthly rate of 0.3%. Importantly, however, some of the more closely watched components of the CPI – including shelter – decelerated from previous months, Cousley said.

“The softening in shelter-price increases was an encouraging sign,” he remarked, adding that the August CPI numbers are unlikely to impact the U.S. Federal Reserve (Fed)’s decision on interest rates at its upcoming policy meeting. Cousley said the central bank still appears very likely to leave borrowing costs unchanged at a level of 5.25%-5.5% at the Sept. 19-20 meeting.

However, it is possible that the Fed could choose to raise rates at the meeting after that, which will take place Oct. 31-Nov. 1, he added. “I’d put the odds of a Fed rate hike in November at about 50-50,” Cousley stated, explaining that upcoming inflation and payrolls data will likely play a large role in the central bank’s decision.

ECB borrowing costs hit a record high of 4%

Speaking of rate hikes, Cousley noted that the ECB announced another increase in its benchmark rate on Sept. 14, lifting borrowing costs by 25 basis points (bps) to 4%. Cousley said that the 4% interest rate is very restrictive, and increases recession risks for Europe.

Already, the eurozone economy is struggling, Cousley noted, pointing to a significant slowdown in the region’s credit impulse, or change in credit growth. “As the flow of credit slows in Europe, the impacts will continue to feed through to the eurozone economy,” he stated, adding that European banks play a much larger role in lending to businesses than in the U.S.

All told, the European economy is in a pretty tough spot at the moment, Cousley remarked. With growth fizzling, he said he expects the latest rate increase to be the final one of the ECB’s rate-hiking cycle.

Are Chinese equities oversold?

Antal-Gilbert and Cousley wrapped up their discussion with a look at China, which is in the midst of a notable economic slump. Cousley noted that with the country’s property market still struggling, consumer confidence remains soft, which has kept a lid on consumer spending. However, he said he doesn’t think that the Chinese economy – the world’s second-largest – has slowed enough to force government leaders to step in with more stimulus. “I think China’s economy has to experience some more pain before this occurs,” he stated.

Cousley said that much of the negative news in China has already been priced into Chinese equities, with the MSCI China Index trading at a forward price-to-earnings (PE) multiple of only 10. Characterizing this number as very low, Cousley said Russell Investments strategists are monitoring a key sentiment measure for potential buying opportunities.

“This indicator looks at investor sentiment for Chinese equities, relative to global equities, for signs of panic. What we’re seeing now is that this indicator is moving toward oversold levels, but hasn’t reached the panic threshold yet,” he stated, noting he’ll be closely watching this indicator in the weeks to come.

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Source: Russel Investments

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