In recent weeks, the prospect of several ECB rate hikes has caused an increase in Bund yields and, unexpectedly, several sovereign spreads. Beyond a certain point, higher spreads may become unwarranted. Under such circumstances, the ECB might consider stepping in to avoid that its policy transmission would be impacted. Determining whether sovereign spreads have increased too much is a real challenge. Historically, based on a 20-week moving window, the relationship (beta) between the BTP-Bund spread and Bund yields fluctuates a lot, so this calls for taking a longer perspective. Using data since 2013, the current spread is in line with an estimate based on current Bund yields. Clearly, other economic variables should be added to the analysis
The significant contraction of the blue area relative to the dotted area illustrates the magnitude of the shock faced by the Chinese economy since March 2022. The resurgence of the Covid epidemic has led to the introduction of mobility restrictions in many provinces, with the most stringent lockdowns affecting major industrial and port regions, notably Shanghai. Restrictions have depressed household demand and dampened activity in factories, disturbed the transportation and export of goods, and led to supply-chain disruptions in China and abroad.
The strength of the employment data reflects a degree of resilience in the Spanish economy in the face of the multiple shocks. According to the Spanish Employment Office (SEPE) an additional 33,366 active workers (+0.2% m/m) were registered in the social security system in May, the thirteenth consecutive month of growth. The government is expecting a further increase in June. Meanwhile, unemployment fell by 41,069 in May, to its lowest level since 2008. This decline was driven by a further drop in youth unemployment (25 and under), of 21,974.
Unsurprisingly, the 16 June meeting of the Bank of England’s Monetary Policy Committee (MPC) led to a further increase in its policy rate, the fifth consecutive 25 basis point increase, taking it to 1.25%. This tightening of monetary policy, relatively modest when compared to the Fed’s 75bp hike, aims to control inflation, which is continuing to rise steeply (2.5% m/m NSA in April, giving a year-on-year figure of 9%), without putting excessive constraints on an economy already hit by the inflation shock.
