ECB May As Well Just Quit Now
Convoluted. That's a one-word description of the ECB's October meeting, which found Christine Lagarde and friends grappling with a macro environment that's every bit as torturously baffling as policymakers' fraught efforts to navigate it.
As expected, Lagarde delivered another 75bps hike, doubling the policy rate in the process, while simultaneously dropping key hawkish language from the statement.
Previously, the ECB planned to raise rates for "several meetings." As of the October statement,
Eurozone inflation of about 10% is about 45% from energy (11% basket weight, 41% inflation), 25% from food (21%, 12%), 15% from goods (26%, 5.5%), 17% from services (42%, 4.3%). Seems that ECB can not, short of causing a huge recession, hope to affect energy inflation effects, including upon food, goods, and services. Europe’s energy inflation has to be addressed by rapid and much higher investment (LNG, nuclear, renewable, storage, transmission, conservation – and weapons). If you back out all energy effects, core inflation might be 3% ish? If tightening slows investment, is its net impact on inflation likely to be constructive?
https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Inflation_in_the_euro_area
Most of those problems get worse as the euro weakens.
Dollar strength is plenty bad by itself for the Euro. With the energy crisis, due to Russia´s decision to use oil as a weapon, and the war in Ukraine, Europe can only swoon under the impact. But then there´s Russia.
The circumstances are very difficult for Europe. We´re definitely sympathetic. But in the process of making war with Ukraine and presenting itself as some kind of indestructible monolith, Russia is slowly but surely destroying itself as a country and its viability in its current form.
I cannot fathom Russia´s completely irrational methods of making war, sense of entitlement, and apparent belief that they´re invincible.
On a positive note:
– Europe’s gas storage is full to the brim. So full that one short term benchmark even dipped negative and wholesale gas prices are basically back to pre-invasion levels.
– Apparently, Russia is pulling out tanks from the 1960’s to deploy in the war because they are simply running out of more modern weaponry. If this is not “scraping the bottom of the barrel”, I don’t know what is.
So in my (admittedly perma-optimistic) mind, the worst is over on every level.
Putin is hoping his Republican friends will cut off US aid to Ukraine.
Putin is (somewhat) nearing the end of his life as a human. Sure, he’s not on death’s door, but my thinking is that this is his last chance to be the Czar, so he’s taking it. Gods will do what Gods will do.