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The ECB “supports” the recession but on 8-9 June will give life to a consultation on the patient Italy

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The ECB “supports” the recession but on 8-9 June will give life to a consultation on the patient Italy
Written by aquitodovale

What will the ECB decide to do this week? Will it take until the July board, letting everything stand still and hoping inflation has hit its peak? Or will it immediately move interest rates upwards, effectively yielding to the not too veiled requests to that effect from Germany and the Netherlands? A couple of variables seem to jeopardize the conservative and wait-and-see vulgate. First, the latest data from the eurozone speaks of inflation at 8.1%, an absolute record. Second, the Central Bank Council will be traveling to the Netherlands, home of the hawks.

But here comes the hypothesis American: that is, playing on the bank with the risk of recession. Just as the Fed is seen by many as engaging in a controlled accident that derails markets to such an extent that it imposes an autumn break in the normalization process, so someone hypothesizes a Lagarde so desperate as to accept the gamble of a Trichet error volunteer. That is, raising rates precisely in the pre-recessionary period, sending the system into a spin. In this sense, the recent movements in the Italian spread would seem to offer a clue that is almost proof. And here comes these charts


Trend of economic growth and inflation in the eurozone
Source: Rabobank / Macrobond


Comparison between the price of diesel at the pump and oil per barrel

Comparison between the price of diesel at the pump and oil per barrel
Source: Rabobank / Macrobond


Criticality trend in industrial components and consumer confidence index

Criticality trend in industrial components and consumer confidence index
Source: Rabobank / Macrobond

seem to confirm the possible playbook emergency: all indicators, from economic growth to inflation trends, from the cost of diesel to the scarcity of industrial components and the collapse of consumer confidence indices, seem to tell us that the latest sanctions package launched by the EU could be substantiated like the proverbial nail in the coffin. Guaranteed recession, amidst prices and uncertainty affecting demand e criticality on the supply chain and consequent increase in output costs that cripple production.

Is it possible to raise rates in such an environment? Wanting to follow the example of 2008, yes. Obviously, only to observe a couple of months of earthquake on the markets and thus generate the perfect alibi to question everything. The controlled indicator, in fact. However, there is a problem. This other chart


Trend in financial and credit conditions in the eurozone banking sector

Trend in financial and credit conditions in the eurozone banking sector
Source_ Rabobank / Macrobond

show how financial conditions in the eurozone are already on the run-up to a sharp contraction todaylegitimate daughter of the uncertainties of the moment that require a conservative approach on banks’ balance sheets. But credit with the dropper means further boost to the slowdown of the real economy, of course. A spiral. Self-feeding. Million dollar question: how will the Italian spread react – the real thing elephant in the room of the contingent situation – to a possible move upwards on ECB rates, even if only purely strategic and in time? And if, as unfortunately appears very likely, a possible jolt sends the yield of our ten-year benchmark above the sustainability alert level of 3.5% (from the current 3.41%), what would be the immediate impact on the stock market on the securities of the banks that are shielding the critical issues of our BTPs with their purchases?

At that point, credit crunch would call another crunch. Until the taps are closed. In the midst of an inflationary blaze and a picture of GDP growth that is anything but reassuring. And here comes this last picture


2022 GDP growth projections by country in the eurozone

2022 GDP growth projections by country in the eurozone
Source: Bloomberg

seems to outline the back-to-the-wall picture in which the Dutch board of the ECB enters: only Estonia can boast lower growth than Germany for the current year, according to projections. Support symptom coming? No. At least in light of the 100 billion already made as a guarantee for aid to businesses by the Scholz government, thanks to a debt ratio that allows ambia room of movement. Indeed, so broad as to prompt the Minister of Finance to announce the return of the politics of zero debt from next year.

Who risks getting hurt more from this diabolical combination, who risks not surviving the perfect storm? That Northern Italy whose dependence on subcontracting to German industry is already heavily under stress from the supply chain and inflation. Like it or not, the meeting next Wednesday and Thursday is likely to result in a medical consultation on the treatment to be administered to the patient Italy, more than in a Council aimed at monetary choices. With the very strong suspicion that someone might opt ​​for one experimental therapystrong in the belief that, in the event of an adverse reaction, Italy could still be saved and made safe. In the hyperbaric chamber of the MES. Immediately.

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