According to ECB President Christine Lagarde, who singled out rates as the bank’s primary tool, the bank will maintain hiking interest rates to control inflation. Stock futures increased on Friday as investors continued to assess earnings reports and speakers from the Federal Reserve used harsher language.

To combat inflation, the ECB has increased rates by an unprecedented 200 basis points since July. The ECB has stated that additional policy tightening will take the form of rate increases and the reduction of its holding of 5 trillion Euros ($5.2 trillion) in debt.

In an address at a conference, Lagarde stated, “We plan to raise rates further—withdrawing accommodation may not be enough.”

The fundamental weapon for modifying our policy stance “is, and will remain, interest rates,” she said. “Since interest rates continue to be the most potent tool for determining our policy stance, it is appropriate that the balance sheet be normalized in a measured and predictable manner,” the statement reads.

Across the US, James Bullard, president of the St. Louis Federal Reserve, stated on Thursday that the policy rate is not yet in a range that might be seen as being appropriately restrictive. He proposed that the proper range for the federal funds rate might be higher than what the market is pricing, in the range of 5% to 7%.

S&P 500 Thursday

The Dow Jones Industrial Average futures increased by 80 points or 0.2%. The Nasdaq-100 futures increased by 0.5%, while the S&P 500 futures traded 0.4% higher.

The ECB’s deposit rate, which is 1.5%, is not too far from the so-called neutral rate, where the bank is neither promoting growth nor inhibiting it. The majority of neutral rate predictions range between 1.5% and 2%, indicating that “accommodation” will have been eliminated following an anticipated raise in December.

The issue is that inflation, which is currently 10.6%, is significantly higher than the ECB’s 2% target, and even a recession, which is now very guaranteed to occur over the winter, is unlikely to reduce price pressures to the point where the ECB can let up on the brakes.

Following two consecutive increases of 75 basis points, investors are split between pricing a 50 or 75 basis point increase in December. They also expect the quantitative tightening (reduction in bond holdings) to begin in the first half of 2023.

In December, the ECB will lay out its intentions for reducing its balance sheet. The procedure is anticipated, to begin with the bank allowing some, but not all, bonds to mature.

According to Lagarde, “The ECB will make sure that a period of high inflation does not feed into inflation expectations, allowing for the entrenchment of too-high inflation.” 

UK Autumn Report on Budget

The UK announced a £55 billion fiscal consolidation plan that includes £30 billion in budget cutbacks (most of which would take effect in FY 2025/26) and £25 billion in tax increases, bringing the total tax burden to a postwar high. 

The goal of UK Finance Minister Hunt’s Autumn Statement was to place Britain on a sustainable path of debt reduction in order to combat inflation and regain investor confidence.

The energy price cap will be extended past April to ease the cost of living pinch, and he also proposed some supportive measures including household handouts and targeted investments to boost long-term growth. 

According to the OBR, the UK GDP will contract by 1.4% in 2019 but inflation will remain at 7.4%.

Key Economic Data 

After the UK’s Autumn Statement is over, focus will return to the economic indicators that are worsening; UK PMIs are likely to reiterate the condition’s deterioration and the impending recession.

UK Retail Sales m/m

In October, UK retail sales were 0.6% higher than projected and 1.5% lower than the prior month. Core retail sales increased by 0.3% MoM compared to 0.6% predicted and -1.5% in the prior period after excluding auto motor fuel sales.

On an annualized basis, UK retail sales fell 6.1% in October, below predictions of -6.5% and -6.8%, while core retail sales fell 6.7% in the reporting month, against forecasts of -6.7% and -6.1%.

Existing Home Sales

One industry where the slowdown has really taken hold is the property sector. On Friday at 10:00 ET (15:00 GMT), existing house sales statistics for October are released. Analysts anticipate 4.38 million, which would represent a little decline from the previous month.

Upcoming Next Week

The majority of the economic data for the upcoming week will be revealed on Wednesday, just before Thanksgiving, before Wall Street closes on Thursday and reopens on Friday for a partial session. On Nov. 23, the Federal Open Market Committee (FOMC) will publish the minutes of its meeting.

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