What happened
The ECB hiked interest rates by 75bp at its September meeting, in line with market pricing which indicated a 75bp hike was slightly more likely than 50bp. This move was accompanied, or in fact necessitated, by significant upward revisions to the inflation outlook, with inflation now standing at 2.3% in 2024, despite simultaneous downgrades to growth forecasts. President Lagarde sent a number of hawkish messages during the press conference, signalling further tightening to come over the «next several meetings» and suggesting the possibility of rates rising beyond the terminal rate (without specifying what that might be) if necessary.
Our interpretation
As the global energy crisis unfolds with Europe bearing the brunt, the ECB has taken the opportunity to frontload policy tightening before economic damage from the energy shock becomes too large. The ECB›s aggressive action and tone send a clear message that - for the time being - its concerns about the de-anchoring of inflation expectations and erosion of its credibility exceed fears of recession. Squeezing in a jumbo hike at today’s meeting was particularly important for the ECB›s credibility in light of increasing downward pressure on the euro and upward pressure on bond yields in recent days. Judging from post-meeting market action, however, the ECB has not done enough to relieve those pressures.
Outlook
For now, the ECB hawks rule. Lagarde’s guidance suggests hiking may continue into the year end and extend well into 2023, potentially going above the terminal rate (which is believed to be around 1.5%). While this messaging might well be a necessary part of the process to tame inflation expectations, we believe this steep hiking path will be hard to implement in practice, not least because of the multiple moving parts impacting Europe’s economic outlook. The ECB›s window for further hikes is closing fast as the reality of the energy shock and a challenging China outlook take their toll.
While we continue to expect the ECB to abandon its hiking cycle later in the year, we note that the macro outlook in Europe remains highly uncertain and will crucially depend on the size and composition of fiscal responses, which - together with developments in the euro and peripheral spreads - will shape the ECB’s path from here.
Asset allocation views
We remain underweight equities and credit and have a strong overweight to cash. Within equity regions, we maintain our underweight to Europe given the recession risk stemming from continued energy disruptions and the ECB›s hawkishness. We recently downgraded government bonds to neutral to reflect global central bank hawkishness against moderating market expectations. Within government bonds, we are overweight Bunds on our expectations of an earlier end to the ECB hiking cycle but are reviewing this position given the importance markets are placing on inflation versus growth.
Important Information
This document is for Investment Professionals only and should not be relied on by private investors.
This document is provided for information purposes only and is intended only for the person or entity to which it is sent. It must not be reproduced or circulated to any other party without prior permission of Fidelity.
This document does not constitute a distribution, an offer or solicitation to engage the investment management services of Fidelity, or an offer to buy or sell or the solicitation of any offer to buy or sell any securities in any jurisdiction or country where such distribution or offer is not authorised or would be contrary to local laws or regulations. Fidelity makes no representations that the contents are appropriate for use in all locations or that the transactions or services discussed are available or appropriate for sale or use in all jurisdictions or countries or by all investors or counterparties.
This communication is not directed at, and must not be acted on by persons inside the United States and is otherwise only directed at persons residing in jurisdictions where the relevant funds are authorised for distribution or where no such authorisation is required. Fidelity is not authorised to manage or distribute investment funds or products in, or to provide investment management or advisory services to persons resident in, mainland China. All persons and entities accessing the information do so on their own initiative and are responsible for compliance with applicable local laws and regulations and should consult their professional advisers.
Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. The research and analysis used in this documentation is gathered by Fidelity for its use as an investment manager and may have already been acted upon for its own purposes. This material was created by Fidelity International.
Past performance is not a reliable indicator of future results.
This document may contain materials from third-parties which are supplied by companies that are not affiliated with any Fidelity entity (Third-Party Content). Fidelity has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content.
Fidelity International refers to the group of companies which form the global investment management organization that provides products and services in designated jurisdictions outside of North America Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. Fidelity only offers information on products and services and does not provide investment advice based on individual circumstances.
Issued in Europe: Issued by FIL Investments International (FCA registered number 122170) a firm authorised and regulated by the Financial Conduct Authority, FIL (Luxembourg) S.A., authorised and supervised by the CSSF (Commission de Surveillance du Secteur Financier) and FIL Investment Switzerland AG. For German wholesale clients issued by FIL Investment Services GmbH, Kastanienhöhe 1, 61476 Kronberg im Taunus. For German Institutional clients issued by FIL (Luxembourg) S.A., 2a, rue Albert Borschette BP 2174 L-1021 Luxembourg.
In Hong Kong, this document is issued by FIL Investment Management (Hong Kong) Limited and it has not been reviewed by the Securities and Future Commission. FIL Investment Management (Singapore) Limited (Co. Reg. No: 199006300E) is the legal representative of Fidelity International in Singapore. FIL Asset Management (Korea) Limited is the legal representative of Fidelity International in Korea. In Taiwan, Independently operated by FIL Securities (Taiwan ) Limited, 11F, 68 Zhongxiao East Road., Section 5, Xinyi Dist., Taipei City, Taiwan 11065, R.O.C Customer Service Number: 0800-00-9911#2 .
Brunei, Indonesia, Malaysia, Philippines and Thailand: For information purposes only. Neither FIL Limited nor any member within the Fidelity Group is licensed to carry out fund management activities in Brunei, Indonesia, Malaysia, Thailand and Philippines.
Issued in Australia by Fidelity Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). This material has not been prepared specifically for Australian investors and may contain information which is not prepared in accordance with Australian law.
ED22 - 155