European Central Bank rate hike means recession looms, bullish oil on steam

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European stocks may have closed higher, but that’s only because investors see the continent getting more serious about tackling inflation – now around 9% in the EU.

Nobody likes high inflation. But the flip side is that rising capital costs will impact large investors and hedge funds that trade on margin as capital costs rise. They will invest less. Rising consumer credit will dampen consumer appetite. All this while the EU is facing a food and energy crisis, largely due to its own political mistakes.

MORE FORBESWill the European economic crisis lead to the global recession?

The European Central Bank today announced an interest rate hike of 75 basis points to fight inflation. This puts the main funding rate at 1.25%. The Stoxx 600 index closed up 0.5%, but by mid-afternoon in New York, the FTSE Europe
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everything overturned.

If there are any bulls left, the ECB has just told them it needs to slow the economy further, even if it is already slowing. Expect Oil to fall to $60 at the rate Europe is going (which is good for Europe, given the fuel fiasco they created). Natural gas prices are down, as expected here.

“We are in a new macro regime,” say investment strategists at the BlackRock Investment Institute, led by Jean Boivin, in a note published on September 6. “Central bankers at the recent Jackson Hole forum have begun to recognize this reality. They do not prioritize the economic implications over the pressure to curb inflation. It seems that they have no intention of dealing with the brutal trade-off between inflation and growth. That’s a big deal,” BlackRock analysts say, adding that bringing inflation back to central bank targets means “crushing demand with a recession.”

This is bad news for risky assets and leveraged investors. An economy in recession should reduce oil and gas prices. This will relieve cash-strapped Europeans who pay high prices for electricity. Alas, this relief could cause them to lose their jobs.

No one pays more for natural gas than the Europeans. Energy prices must collapse to help the ECB fight wage and investment killing inflation.

Europe’s problems are likely to get worse

Investors will worry that rising interest rates will add to the stress felt by consumers and businesses faced with exorbitant energy bills. Many of them are heavily in debt.

S&P Global’s Purchasing Managers’ Index (PMI), seen as an indicator of the health of the economy, fell to an 18-month low of 48.9 in August from 49.9 in July, which was lower than a preliminary estimate of 49.2 for the month. Anything less than 50 years old is a shrinking economy.

Germany saw spending on services fall for a second consecutive month in August. Rising prices and loss of confidence have dampened domestic demand, contributing to the recent drop in fuel prices. In addition, governments cap electricity prices. Futures speculators exit the market, cashing in their tokens. This will help, if the market continues to sell.

French purchasing managers are predicting a gloomy start to autumn and winter. Businesses fear that inflation and rising electricity bills will reduce revenue and demand.

Italy’s service sector saw growth slow to its lowest level since January.

“Things are only going to get worse for the euro zone and the euro in the short to medium term,” says Naeem Aslam, chief market strategist at AvaTrade in London. He thinks the Euro will fall to $0.95 or lower. It is currently trading at one euro for one dollar.

“Everyone is exceptionally sentimental now,” Aslam says of life in the UK. This was hours before Queen Elizabeth died, which will likely add to the sadness that pervades the island. Their problems are similar to those currently facing European countries – mainly the high cost of food and fuel. “People are seeing their money fly out of their wallets due to the higher cost of living. People here and in Europe are not used to watching their spending and worrying about paying their bills.

Will the United States follow Europe?

Other than the energy crisis in California, an ongoing problem there, no one else seems to have a European-style crisis in the lower 48 states. But consumer sentiment is weakening.

Just under half (48%) of Americans say they are confident in their ability to weather a recession, according to an Experian poll.

According to the Experian survey:

  • 55% of American adults say they are very or extremely concerned about the state of the economy.
  • 73% fear rising prices (gas, groceries, rent, etc.) will continue to rise to a level they cannot afford.
  • More than a third say they are using credit to cover essential expenses right now, and more than half of those with credit card debt say the debt has increased in the past 3 months.
  • Two in five believe they will need to rely on credit to cover essential and unexpected expenses over the next three months.
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