The ECB raised rates by 75bp and signalled that they could hike by that factor again in October. However, the Central Bank’s forecasts for the eurozone were more troublesome. The ECB sees 2022 inflation at 8.1% (raised from 6.8%), with inflation topping 5.5% next year (up from 3.5%) and at 2.3% in 2024, implying that it will remain above target until 2025 at the earliest. The growth outlook is similarly dire but they held back from forecasting a recession like the Bank of England did. The ECB are forecasting GDP to settle at 0.9% in 2023 from 2.1% previously. Markets are also becoming accustomed to “Trussonomics” in the UK, just as they familiarize with the protocol ahead of King Charles III reign. The UK will enter ten-days of mourning, with a public holiday on the day of Queen Elizabeth II funeral, when the London Stock Exchange, banks and UK gilts market will close. This also means the Bank of England interest rate decision will be postponed to September 22 (the day after the FOMC). The volatility in gilts on the back of outsized fiscal initiatives caused government bonds to widen +10-28bp, where bunds reacted to the ECB decision and widened +12-25bp. U.S. Treasuries were +8-10bp wider on the week given Powell’s comments and hawkish Fedspeak. For many emerging markets, the downside surprises in inflation were somewhat unconvincing this week, aside from the softness out of Brazil and China. Hungary’s monthly inflation showed signs of slowing, but headline inflation is already at 15.6%. Then Mexico’s inflation print surprised to the upside (8.7%), just as Chile’s came in at 14.1%, which could be why the Chilean Central Bank reacted steadfastly with a 100bp hike (consensus was 75bp). Poland is another good example of a Central Bank that dovishly hiked rated by 25bp in the face of headline inflation of 16.1%. However, a decline in Eurozone headline inflation could soon come with further EU measures aimed at capping gas prices, following the G7 Russian oil price cap introduced last week.

The People’s Bank of China lowered the reserve requirement for FX deposits by 200bps to 6% over the weekend in the backdrop of CNY depreciation, freeing-up just under 20 billion dollar of FX liquidity. We believe there is some room for additional FX pressure on the spot rate, although we think authorities will aim to keep it from significantly breaching 7.0 yuan per dollar and target stability heading into the Party Congress next month. The move came after the Chinese yuan's recent slide to two-year lows. The yuan has depreciated by 8% against the dollar in the year to date, as a result of broad dollar strength in global markets and China's worsening economic slowdown. The reduction in reserve requirements would boost dollar liquidity. Based on end July data, when foreign exchange reserves stood at 953.7 billion dollars, the lower requirements would free up around 19 billion dollars. Meanwhile, August trade data moderated relative to recent months with export growth of 7.1% y/y vs. 18% y/y in July on a partial retrace of the post-lockdown recovery and softer global demand. Import growth also eased to 0.3% y/y from 2.3% y/y as domestic consumption remained constrained. While exports will likely face further pressure as global demand wanes and zero-COVID largely remains intact, the current account should remain in surplus given travel restrictions and associated import softness. Growth 2022 forecasts are continuing to lower around 3.5%. Barclays notably lowered their estimate to 2.6% this week. While the recovery continues to flow, the credit impulse has moved back into positive territory indicating some room for incremental improvement with any larger scale upside dependent on COVID and property sector policy.

Russia has indefinitely suspended natural gas flows through the Nord Stream 1 pipeline, exacerbating a squeeze on Europe’s energy supplies and deepening the recession risks faced in the EU. US inflation data in the coming week may give the Federal Reserve mixed signals ahead of a potential third-straight jumbo interest-rate hike, with a broad measure of consumer prices likely to simmer down even as a gauge of underlying pressures accelerates.  The government’s report is expected to show an 8% increase in the overall consumer price index from the same month last year, down from 8.5% in July yet still historically elevated. Stripping out energy and food, the CPI is forecast to climb 6.1%, up from 5.9% in the year through July. Federal Reserve officials look on track for another jumbo increase in interest rates this month, as they hasten to crimp demand and assure Americans, they will bring inflation back down to 2%. It is expected a 75-basis point hike following Chair Jerome Powell comments, that implicitly or explicitly endorsed a third consecutive 75 basis-point increase. Powell had previously said the decision was between that and a half-point increase, depending on the data. Officials now enter a blackout period on public comment ahead of the meeting. If the Fed does go big again -- and investors have fully priced such a move in financial markets -- it will represent the most aggressive series of rate increases since former Chair Paul Volcker was battling inflation back in the 1980s. The rush to get rates to restrictive territory, in which policy is restraining economic activity and not stoking demand, is rooted in the committee’s sense of asymmetric risks from inflation being too high for too long. Officials worry that a long period of high inflation will erode public confidence that the central bank can deliver 2% inflation, making it more costly for the Fed to get back to the target.

Volkswagen said it would list Porsche in an IPO on the Frankfurt Stock Exchange that will take place in either late September or early October. The German carmaker is offloading only a portion of the stock, some of which will go to the Porsche-Piëch families, VW’s biggest shareholders. The rest will be sold to individual investors. VW will retain the remaining shares. The flotation could raise as much as 10.6 billion EUR (10.5 billion USD), which would make it the biggest stock market listing in Europe since Glencore in 2011. Volkswagen stock (has declined by close to 35% year-to-date, roughly in line with other automotive majors, as the company continues to be impacted by the component supply shortage and concerns about a broader global economic slowdown. VW’s total deliveries over Q2 2022, the most recent reported quarter, fell by about 22% versus last year to 1.98 million units, as the semiconductor shortage continued to impact production. That said, strong demand is enabling VW to prioritize the sales of more expensive models and trims, helping Q2 revenues rise 3% year-over-year to 69.5 billion Euros ($71 billion) despite the decline in volumes. Now there are signs that the semiconductor shortage could ease in the coming months helping VW to ramp up production over the second half of the year. However, there are concerns about the global economy amid rising interest rates and negative GDP growth in the U.S. over the last two quarters. Moreover, Europe could see even more pronounced headwinds as Russia recently cut off gas supplies. This could result in surging heating and electricity prices, potentially impacting consumer spending in the region. This, in turn, could pose a risk to VW’s business, as Europe accounts for close to 40% of VW’s sales.

All the signs are that he will lose an election and say he won it. Next month president, Jair Bolsonaro, will face an election that every poll says he will probably lose. He says he will accept the result if it is “clean and transparent”, which it will be. Brazil’s electronic voting system is well-run and hard to tamper with. But here’s the catch: Mr Bolsonaro keeps saying the polls are wrong and he is on course to win. He keeps insinuating, too, that the election could somehow be rigged against him. He offers no credible evidence, but many of his supporters believe him. He seems to be laying the rhetorical groundwork to cry ballot fraud and deny the voters’ verdict. Brazilians fear he could then incite an insurrection, perhaps like the one America suffered when a mob of Donald Trump’s supporters invaded the Capitol on January 6th 2021—or perhaps even worse. The best outcome would be for Mr Bolsonaro to lose by such a wide margin that he cannot plausibly claim to have won, either in the first round on October 2nd, or (more likely) in a run-off on October 30th. It will be a tense, dangerous few weeks. Other countries should publicly support Brazilian democracy, and quietly make clear to the Brazilian military that anything resembling a coup would make Brazil a pariah. Brazilian voters should resist the pull of a shameless populist. They, and their country, deserve better