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Europe's Energy Crunch in Focus: Global Week Ahead

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In the Global Week Ahead, a large policy rate hike could be in store from the European Central Bank (ECB) to combat soaring consumer price inflation.

While seen globally, energy costs are adding even more oomph there.

Announced on Monday, a new U.K. leader will confront a barrage of macro challenges.

Crude oil markets will address OPEC's latest meeting, which also happened Monday.

Next are Reuters’ five world market themes, reordered for equity traders—

(1) On Thursday, the ECB will raise its policy rate 50 bps or 75 bps

The European Central Bank (ECB) appears set to deliver a second (big) interest-rate hike on Thursday — front-loading policy tightening before economic conditions deteriorate further.

With record-high inflation fast approaching double digits, a key question is whether the ECB will go for a 50-basis-point hike, as it did in July, or opt for a supersized 75-bps move.

Some (such as Goldman Sachs) expect the latter after the latest inflation data, while some ECB officials believe a 75-bps move should be at least discussed.

Board member Isabel Schnabel warns that central banks risk losing public trust and must act forcefully to curb inflation, even if that drags their economies into recession.

(2) On Tuesday, the ISM Services PMI

Investors gauging the Federal Reserve’s interest rate path for the months ahead got another morsel of economic data on Tuesday, when the Institute for Supply Management (ISM) reported the results of its monthly Services sector survey.

The headline figure unexpectedly rose to 56.9% instead of contracting, as expected — up from the 56.7% posted for July. This is the strongest growth in ISM Services we’ve seen in four months, led by Business Activity and New Orders.

Recall the U.S. Services industry unexpectedly picked up in July as well, adding to a panoply of data showing the economy was humming along despite several big rate hikes. Analysts polled by Reuters had expected a reading of 54.8 for August.

U.S. stocks weakened in the days following the hawkish message from Fed Chair Jerome Powell at August’s Jackson Hole conference, which left little doubt the central bank was determined to go all out in its fight against inflation.

Yet economic indicators, starting with the ISM index, had been thought might shape views of the rate trajectory, with signs of continued strength bolstering the case for the Fed to continue going full throttle. But today’s headline does not curtail to this notion.

(3) Reserve Bank of Australia (RBA) raises policy rates 50 bps

The Reserve Bank of Australia delivered another 50-basis-point rate hike on Tuesday, as it scrambles to contain the highest inflation in more than two decades.

It has raised rates every month since May, but RBA policymakers, analysts and investors all agree that the most aggressive tightening since the early '90s leaves much to be done.

The central bank got badly wrong-footed at the outset: Governor Philip Lowe had said early on that borrowing costs would not need to rise until 2024.

The race to raise rates has not done much to buoy the Aussie dollar, which has been bumping along near a six-week low versus a resurgent greenback.

Canada's central bank, meanwhile, is widely expected to deliver another big rate hike on Wednesday.

(4) On Monday, OPEC met

Volatile oil markets could see another shake-up stemming from Monday's meeting of the Organization of the Petroleum Exporting Countries and allies including Russia.

The OPEC+ gathering is in focus after Saudi Arabia recently raised the possibility of production cuts.

Surging energy costs this year have plagued global economies as Russia's invasion of Ukraine exacerbated supply concerns. Oil prices moderated over the summer amid some uncertainty over fuel demand, with central banks raising interest rates to squash inflation.

Benchmark Brent was recently in retreat to around $93 a barrel after breaching $105 on Monday.

(5) Also on Monday, the U.K. announced its new Prime Minister

Britain's new Prime Minister was announced on Monday after a nearly two-month-long contest to succeed Boris Johnson as the leader of the ruling Conservative Party.

Liz Truss, the Foreign Minister, won after a campaign full of promises to slash taxes to kickstart economic growth. Her rival, ex-Finance Minister Rishi Sunak, has accused her of making unfunded policy pledges that will stoke inflation and threaten Britain's public finances.

This leader will face one of the most daunting economic backdrops in decades. The Bank of England is hiking interest rates rapidly to tame surging inflation, just as the economy is tipped to slide into a recession that the BoE forecasts will last until 2024.

Along with issues including addressing soaring energy bills, the new prime minister will want to calm financial markets. British government bonds suffered their worst month in August since records began, and the pound recently dropped to a 2-1/2 year low as investors dumped UK assets, fearful the country is in a worse position than elsewhere.

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Key Global Macro

I would keep my eyes on the ECB policy statement, out on Thursday, and the big Euro Area meetings on Friday.

On Monday, it was Labor Day in the USA and Canada.

The Eurozone’s retail sales for July came out. The prior reading was -3.7% y/y.

On Tuesday, the RBA in Australia lifts policy rates 50 bps, in advance of the Fed. They are at 1.85% now.

ISM Services PMI posts 56.9% in August, after printing 56.7% in July. Both are still quite hot.

On Wednesday, Mainland China’s FX reserves are a whopping $3.104T. We get an update.

The Bank of Canada (BoC) follows up with a policy rate decision of its own. They are at 2.5% now.

The Fed’s Beige Book comes out.

On Thursday, there is an ECB press conference, and a monetary policy decision.

On Friday, there is a Eurogroup meeting and a Euro Area EcoFin meeting. The energy crunch is surely the topic.


Will the Eurozone and the U.K. topple into a recession, due to soaring energy costs?

Leaders within that region have a major issue to deal with. I don’t think it is a surprise that OPEC meets in advance of the ECB, and the Euro EcoFin, and Euro Group, meetings.

That’s it for me.

Have a great trading week.

Warm Regards,

John Blank
Zacks Chief Equity Strategist and Economist

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