Report6 October 2022Updated one month ago

ING’s October Monthly: bracing for a tough winter

Temperatures have begun to fall across Europe, bringing a stark reminder of the challenging winter to come. Several major economies are poised to enter, or are already in recession. For now, central banks are sticking to their hawkish strategy. But with growth slowing and inflation set to fall next year, the first rate cuts may not be that far away

Executive summary

Our key calls this month

• The US economy is likely to deteriorate in 2023 with consumer spending and business capital expenditure set to fall, while unemployment is likely to rise. We expect a 75bp rate hike from the Federal Reserve in November and a further 50bp in December. But mounting concerns about growth and the housing market are likely to lead to rate cuts from the third quarter of 2023.

• The eurozone is entering a recession and we expect a deeper downturn over the winter months. But inflation has hit double-digits and we don’t expect headline inflation to fall to the ECB’s 2% target until 2024. We expect a 75bp hike in October, followed by 50bp in December and 25bp in February 2023, bringing the deposit rate to 2.25%.

• The UK government has U-turned on part of its controversial tax plan but markets are looking for further measures to reduce borrowing requirements. We expect a 100bp rate hike in November but think the Bank of England is reaching the limits of how far it can realistically tighten. Mortgage rates have already spiked and together with higher (albeit capped) energy prices, a mild recession still looks likely.

• China’s economy has recovered slightly due to more flexible Covid measures. But the real estate crisis will put pressure on economic growth if home sales do not pick up. Infrastructure stimulus has yet to impact growth as local government spending has been split between finishing uncompleted homes and infrastructure investment.

• For FX, three quarters of negative growth into 2Q23 and a still hawkish Fed is a bearish cocktail for EUR/USD. This pair is not particularly cheap and a pick-up in gas prices this winter will keep the eurozone trade balance under pressure. This could see EUR/USD falling towards the lower end of a 0.90-0.95 range over the next three to six months.

• There is a big fall in market rates to come, but not till the Fed is much closer to being done. Until then, don’t be too surprised to see a 4% 10-year Treasury yield again in the weeks ahead. And in the eurozone, the German 10-year back above 2% and the 10-year swap rate above 3%, are all entirely possible.