The ECB Governing Council has surprised markets by a 50 bp rate hike and by dropping its forward guidance and moving to a data-dependent tightening cycle. This may reflect unease about how quickly the euro area economy might react to the policy moves and about the consequences of uncertainty about gas supply during the winter months. Another key decision was the introduction of the Transmission Protection Instrument (TPI), a tool to address unwarranted spread widening that would weigh on the effectiveness of monetary policy transmission. The data dependency of further rate hikes and the vagueness about the triggers for using the TPI may lead to an increase of the volatility in interest rates and sovereign spreads whereby investors try to understand the ECB’s reaction function.
Although supply timescales are still historically long, the PMI index which assesses them has gradually improved since last autumn. According to the PMI sector survey, this reduction in delivery times can also be seen in most industries, particularly in the automotive, electronic equipment and agri-food sectors. As a result of these reductions, the backlogs of work indicator recorded its biggest fall in over two years. The aggregate value chain pressures index, which is published by the Federal Reserve of New York, confirms these positive developments. It has fallen to its lowest level since March 2021. These gradual but continuous improvements should help to ease some of the inflationary pressures currently weighing on the manufactured goods sector in particular.
The world recorded 6.9 million new confirmed COVID-19 cases between 13 and 20 July, 9% more than in the previous week. This was a fifth consecutive week of rising case numbers. Asia saw the largest weekly growth. At the same time, footfall in shopping and leisure facilities in France, Belgium and Germany remains at its pre-COVID-19 level, while in Italy it is no longer very far off. However, footfall is still below the pre-pandemic level in the US, UK, Spain and Japan.
