Can Go Higher

European Central Bank President Christine Lagarde said there’s “still a way to go” on raising interest rates to counter record inflation. Price growth in the euro zone, which hit 10.7% last month, is “way too high,” Lagarde said Thursday evening in an interview with Latvian television. She said the ECB will use all of its instruments to return it to the 2% target.ECB officials are doubling down on their inflation-fighting rhetoric, even as a downturn looms over the 19-nation euro area’s economy. Lagarde said earlier Thursday at a conference in Riga that while a “mild recession” is possible, that wouldn’t be sufficient to tame inflation.

UK Recession

Britain is headed for a deep recession, with the Bank of England working to clamp down on inflation in a move that may cost the economy at least half a million jobs. The UK central bank pushed through its biggest interest rate increase in 33 years on Thursday, bringing the benchmark lending rate to a 14-year high of 3%. It estimated unemployment may rise to just above 5% even if borrowing costs remain steady and the economy may shrink 1.7% over 18 months — not recovering for three years. The outlook underscores the headwinds Rishi Sunak’s government faces in the runup to the next election, with the Treasury planning a package of spending cuts and tax increases on Nov. 17.

Scholz in Beijing

German Chancellor Olaf Scholz has arrived in China with a major business delegation for his first in-person meeting with President Xi Jinping, as tensions rise between Beijing and Brussels. Xi is welcoming the first major European leader to China in more than two years on the heels of a domestic political victory, having just secured a precedent-defying third term in office. The one-day visit on Friday also comes as China rebounds this week from a record market rout sparked by policies Xi laid out at last month’s congress. The Chinese leader’s efforts to solidify ties with Germany are part of a broader push to prevent relations with the European Union from further deteriorating.

Extreme Inversion

A key segment of the US Treasury yield curve reached new extremes of inversion Thursday, touching a level not seen since the early 1980s when the Federal Reserve also was aggressively tightening policy. The two-year note’s yield exceeded the 10-year note’s by as much as 58.6 basis points. The inversion briefly exceeded 58 basis points on Aug. 10, last seen about 40 years ago when then-Fed Chair Paul Volcker’s rate hikes to break inflation tanked the economy. Curve inversions have a track record of preceding economic downturns by 12 to 18 months. The policy-sensitive two-year has led this year’s relentless rise in Treasury yields.

Coming Up…

European stock futures nudged higher and Asian shares advanced ahead of a key US jobs report. The UN’s Food and Agricultural Organization releases its monthly index of world food prices. ECB President Christine Lagarde and Boston Fed President Susan Collins speak at events. Data include German factory orders and French industrial production. Amadeus, Enbridge and Duke Energy are also among names set to report.

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(Source: Bloomberg, Nov. 4-2022)