Eurozone PMI Growth Ticks Down Ahead of ECB July Rate Decision
Traders are pricing in the latest risk to Europe’s economy after the latest S&P Purchasing Manager Index benchmark for June declined to 52 from 54.8 in May. While still technically in growth territory, news of the slowdown comes ahead of the European Central Bank’s (ECB) interest rate decision on July 21, when monetary policy makers are expected to hike their key interest rate guidance from 0 to 0.25 percent.
The main question is whether Europe’s economy can return to stronger growth once monetary tightening begins. Accessing credit for corporations and households will become more expensive, impacting on investment and spending. Existing loans will have higher repayment levels, meaning that if the ECB raises key interest rate guidance too quickly, there could be a risk of defaults in the banking and financial sector. Having said that, raising interest rates would also mean more income for the financial sector after many years of low interest rates, which could support investors in terms of dividend returns in the medium-to-long term.
On top of these challenges, geopolitical events in Ukraine continue to add to inflationary headwinds and if Europe tips into the type of recession that weighs on employment, it could lead to a period of stagflation.
The EUR is heavily under pressure from the USD as safe-haven sentiment and pre-NFP positioning strengthened the currency this week. The Eurozone’s single currency dipped to a low of 1.0239 on July 5, once again bringing up the possibility of parity with the USD.
On the brighter side, crude oil spot prices appear to have subsided by nearly $20 since the end of June, hovering around $100 per barrel at the time of writing. Any downward pressure on inflation is a good development for Europe’s economy. In addition, once Europe’s interest rates head upwards, there’s a better chance of taming inflation.
Market-moving trading news today includes the Eurozone’s Retail Sales for May. The benchmark is expected to have risen from 3.9% to 5.4% on an annual basis. Any surprises to the upside or downside could move the EUR currency pairs at this sensitive time in Europe’s economy.
In other news, the FOMC’s Minutes are released later today with insights into the US central bank’s analysis of the economy and interest rate expectations. Depending on traders’ reaction to the content of the Minutes, the USD currency pairs could move. Finally, there’s more data from the US with the ISM Services PMI results for June, expected to have declined from 55.9 to 54.5.
What are the conditions of stagflation?
Three conditions have to exist for stagflation: high unemployment, low growth and high inflation. If there are only two conditions, say low growth and high inflation, there’s a better chance of improving the economy. When all three conditions exist at the same time, it usually requires massive fiscal and monetary policy stimulus to revive the economy.
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