[This Week’s Outlook] Focus on Friday: Divergent PMI Trends in Europe and the U.S.; Russia-Ukraine Conflict Exacerbates European Supply Chain Bottlenecks!

One of Russia’s key levers of influence over Europe lies in energy supply. Conversely, Europe has been especially proactive in imposing sanctions on Russia—yet if Russia defaults on its debt, European creditors will inevitably suffer. As the leading bloc sanctioning Russia, the eurozone stands to incur significantly greater damage than the United States, which remains geographically distant and merely fans the flames from afar. Data from the eurozone and the UK may therefore carry greater weight this week, since the U.S. Federal Reserve’s 50-basis-point rate hike in May is virtually certain—FedWatch currently assigns it a 91% probability. Against the backdrop of persistently high U.S. inflation and still-solid economic growth, there is simply little justification for Chair Powell and the Fed to delay tightening monetary policy. The reason for focusing on eurozone data stems largely from the European Central Bank’s (ECB) recent policy meeting. The ECB’s asset purchase program remains in net-buying mode—but purchases will taper sequentially over the next three months: €40 billion per month in April, €30 billion in May, and €20 billion in June. By July, the ECB is expected to conduct its final month of net asset purchases. What happens once net purchases reach zero? Drawing on the Fed’s experience, interest rate hikes typically follow soon thereafter—this time even more rapidly, as if the entire hiking cycle were playing at accelerated speed. Extrapolating from this pattern, the ECB’s June meeting is highly likely to announce that net asset purchases will end in August or September. This timeline has been confirmed by ECB President Christine Lagarde, who stated: “The European Central Bank will first conclude its asset purchase program before proceeding to raise interest rates. The precise timing for ending purchases will be assessed in June. The interval between ending asset purchases and initiating rate hikes may range from one week to several months. We expect credit standards to tighten over the coming months, but it is still too early to discuss tightening policies.”

This week, attention turns to Europe.

The U.S. has now concluded its密集 release period for major economic data this month; this week’s focus shifts squarely to Europe. First up is the European Central Bank’s (ECB) monetary policy meeting on Thursday. During China’s National Day holiday period, ECB President Christine Lagarde and other officials hinted that a third interest-rate cut could occur at the October meeting. Markets seized on these signals: current pricing fully reflects two 25-basis-point cuts for the eurozone by year-end—broadly aligned with market expectations for the Federal Reserve. A 25-basis-point cut in October would be a reasonable policy decision for the eurozone: On one hand, eurozone PMIs deteriorated sharply after the conclusion of the August Olympics, showing simultaneous weakness in both manufacturing and services; meanwhile, CPI turned negative on a month-on-month basis in September, with deflationary pressures accelerating. On the other hand, the Fed’s 50-basis-point cut in September has further widened the scope for easing among G10 central banks. To date, the eurozone’s pace of easing matches that of the U.S.—a positive development for the euro. However, since the market has already fully priced in a 25-basis-point cut for October, the main focus of this meeting may instead lie in updated economic forecasts and forward guidance on the future path of rate cuts. Should the ECB’s tone remain dovish, it could continue to dampen the euro’s rebound momentum. Having discussed the euro, let’s now turn to the pound sterling. Following the Labour Party’s decisive electoral victory, the UK’s fundamental economic recovery has remained robust—a point we have highlighted repeatedly in our analyses, including in articles titled ‘The Pound Is Worth the Wait.’ Moreover, both the UK and the U.S. currently maintain the highest policy interest rates among G10 nations, meaning no interest-rate differential exists between them—an inherently supportive factor for the pound. After two consecutive months of rate cuts in August and September, the UK’s unemployment rate and CPI data for September—due for release this week—will offer critical insight into how effective those cuts have been. If CPI continues to stabilize and unemployment does not rise further, the pound is likely to retain strong fundamental support.

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