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ECB’s assets decreased by 800 billion euros. Mexico also rose today, well ahead of the Fed, preventing the peso from falling against the US dollar.

By Wolf Richter for WOLF STREET.

On Thursday, the S&P 500 index fell by 2.5%. It fell 5.0% after Tuesday morning’s gains. The Nasdaq is down 3.2% today. It fell 6.5% after Tuesday morning’s rise. Stock indexes in Europe were deep in the red, with Germany’s DAX and France’s CAC 40 down more than 3% on the day and about 4.4% since Tuesday’s gains.

It comes after the Fed became more hawkish yesterday, pointing to a rate above 5% and taking any 2023 rate cut off the table, and after the ECB turned more dovish this morning. hard and 50 basis points to the downside. that he now sees, and said it was “obvious” that there would be a series of 50 basis point rate hikes despite any decline, and he announced that QT on bonds would begin in March, after it had already had started QT. related to loans from the previous assembly, which has already led to a 9% decline in its balance sheet.

And it comes after the Bank of England today announced a 50 basis point interest rate hike, although it sees a fall. And the SNB announced a 50 basis point rate hike and said it had sold foreign currency assets. And not to be outdone, the Bank of Mexico announced a 50 basis point increase. And they all put more rate hikes on the table.

The ECB is now headed for recession, according to their own economic forecast. It expects this decline to be “relatively short-lived and shallow” starting this quarter. But it could get worse, according to ECB President Christine Lagarde, who added at a press conference that “the risks to the economic growth outlook are to the downside, especially in the near term.”

It raised its three interest rates by 50 basis points. deposit rate up to 2.0%; the main refinancing rate is 2.5% and the marginal lending rate is 2.75%.

The rate of walking in a recession is very frenetic. And it revised its inflation outlook.

“Interest rates have yet to rise significantly at a sustained rate to reach sufficiently restrictive levels…” Lagarde said it was “pretty obvious” that “a steady pace means we’re going to have to raise rates at a 50 basis point rate for a while.”

The ECB is struggling with rampant inflation. Total CPI inflation is 10%, CPI inflation excluding energy is at a record 7.0%, and in some Eurozone countries it is over 20% and even in Germany it is 11%. Inflation started to pick up in 2021 after years of mega-QE and negative interest rates. And suddenly it’s a huge mess.

QT on the bonds will begin in March 2023Today it is said to be losing €15 billion a month in bonds until 2023. The pace of further declines “will be determined over time.” Details will be announced after the February meeting, according to the message.

QT on loans has already started meeting in October “to help eliminate unexpected and extraordinary increases in inflation,” as it was said at the time. For this, it has made the terms of its Targeted Long-Term Refinancing Operations (TLTRO III) less attractive for banks, which will accelerate banks’ exit from these loans.

These loans have repayment dates, and two of those repayment dates have already passed;

  • In November, banks returned 296 billion euros to the ECB, which was recorded in the ECB’s balance sheet on November 25.
  • In December, banks returned 447 billion euros worth of loans, which have not yet been recorded, but will be recorded in December.

This TLTRO III discharge was a major factor in reducing its balance sheet by €803 billion, or 9.1% from the June peak. The green line is my estimate of the next balance sheet, based on the announced TLTRO III cut of €447 billion. Total assets will decrease to about 8.03 trillion euros.

The Bank of England also fell into recession, today by 50 basis points to increase its bank interest rate to 3.5%. Citing its monetary policy report, it said: “The UK economy was expected to be in a prolonged recession and CPI inflation. [currently 10.7%] it was expected to remain very high in the near future.’

The Swiss National Bank sold off foreign currency assets and raised its interest rate 50 basis points to 1.0%, after raising 75 basis points in September and 50 basis points in June, and put further rate hikes on the table. Gone is the policy’s negative interest rate of -0.75%.

It does this to counter “increasing inflationary pressure and further inflationary spread”. Inflation in Switzerland was 3.0% in November and “is likely to remain at a high level for now,” it said.

“We have sold foreign currency in recent months to ensure adequate monetary conditions. We will also sell foreign currency in the future if it is appropriate from a monetary policy perspective,” SNB head Thomas Jordan said in his speech. This follows its announcement in June and September that the SNB would do so.

And the SNB has done it. In the second and third quarters, as we know from the SNB’s SEC filings, it unloaded hundreds of thousands of shares of its largest holdings of US stocks, from Apple, Microsoft, Alphabet, Amazon and Meta to the bottom. And it suffered huge losses as asset prices in its vast portfolio of foreign currency-denominated securities fell.

The Bank of Mexico stepped up Up 50 basis points today to 10.5%, after four straight hikes of 75 basis points, mirroring the Fed. Core inflation in Mexico reached 8.5 percent.

The Bank of Mexico started the campaign in mid-2021 from 4.0%, about a year before the Fed, to stay ahead of the Fed, as in Brazil and some other central banks. They did this to fight inflation at home and support their currencies against the dollar.

What worked? During 18 months of rate hikes, the Mexican peso strengthened against the US dollar, while the currencies of laggards such as the ECB and the Bank of Japan watched their currencies fall.

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