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Biden’s IRA has left Europe blind-sided. And playing catchup could lead to 2 big mistakes

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US President Joe Biden, front, and Ursula von der Leyen, president of the European Commission.

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The European Union is working against the clock to create a program to rival President Joe Biden’s unprecedented climate subsidies. But it’ll face two key issues in the process.

The EU had, for a long time, asked the United States to be more active on climate policy. Biden delivered on that with the Inflation Reduction Act. But it has raised competition issues for European businesses — which has upset politicians in the region. Brussels has been left considering how best to respond.

“U.S. legislation doesn’t pass overnight,” Emre Peker, director at the consultancy group Eurasia, told CNBC, adding that the EU could have acted faster.

“The EU was asleep at the wheel … with 28 representations in Washington, Europeans could’ve done more to counteract the IRA before its adoption.”

The U.S. Inflation Reduction Act, also referred to as IRA, was approved by U.S. lawmakers in August and includes a record $369 billion in spending on climate and energy policies.

Among other aspects, it provides tax credits to consumers who buy electric cars that were made in North America — this could automatically make European-made EVs less attractive to buyers because they are likely to be more expensive.

We will continue to further invest into the region to achieve significant growth.

Some European firms have recently announced investment plans in the U.S. to benefit from an anticipated pick-up in demand. And more could follow suit.

“Volkswagen has ambitious targets for the North American region. We now have a unique chance to grow profitably and to grow electric in the U.S.,” a spokesperson for the German company, one of the biggest car manufacturers in Europe, told CNBC via email.

Enel, an Italian energy firm, is concentrating 85% of its 37 billion euro ($40.2 billion) investments between 2023 and 2025 in Italy, Spain and the U.S.

“Specifically relating to public support policies, the IRA encompasses unprecedented measures on green tech and we think it could act as a stimulus for the EU to move forward in that direction, in order to support a substantial scale-up of renewable technologies which are key for our continent’s energy independence,” a spokesperson for the company told CNBC via email.

Luisa Santos, deputy director at BusinessEurope, a group of business federations, told CNBC that “it is still a bit early to say who will invest where.” “But it is very clear some companies will invest in the U.S. in any case,” she added, referencing an expected surge of investment toward the U.S. — at the expense of Europe.

Outspending others

European officials are currently looking at relaxing state aid rules so governments have more room to financially support key companies and sectors.

The European Commission, the executive arm of the EU, is due to present a proposal in the coming weeks.

But this solution might not be ideal. Countries with bigger budgets will be able to deploy more funds than poorer nations, which risks the integrity of the EU’s much-vaunted single market — where goods and people move freely and which accounts for more than 440 million consumers.

Belgian Prime Minister Alexander de Croo told CNBC that more state aid “is not a good answer.”

“There’s a level playing field [in Europe]. Belgium is a small market, very open economy, Germany is a big market. If this becomes a race of who has the deepest pockets we are all going to lose and it would lead to a subsidy war with the United States,” de Croo said earlier this month.

Several other experts have also raised concerns about easing state aid rules. Former Italian Prime Minister Mario Monti told Politico Europe this is a “dangerous” approach.

In a letter issued last month and seen by CNBC, Europe’s Competition Chief Margrethe Vestager said: “Not all member states have the same fiscal space for State Aid. That’s a fact. And a risk for the integrity of Europe.”

Slow to respond

In addition to challenges with state aid relaxation, timing is also a risk.

European officials will discuss and decide how to provide more green incentives for the medium to long-term. On the one hand, some argue that current European investment programs should be redeployed toward these subsidies. But on the other hand, others argue that the bloc will need to raise fresh cash to implement such a huge project.

Thus, it’ll likely turn into a deep and strained political matter that could drag for awhile.

Paolo Gentiloni, Europe’s economics commissioner, said Tuesday in Berlin that there are “different views” on the table.

“But I am satisfied there is a clear intention to engage in this discussion,” he said following conversations with Germany’s Finance Minister Christian Lindner, who’s previously stated he would not support new public borrowing.

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Business

UBS earnings Q4 and FY 2022

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UBS reported fourth quarter and full-year earnings.

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UBS beat market expectations with its latest results on the back of lower expenses and higher interest rates. But the lender’s revenues declined because of weaker client activity.

The bank reported $1.7 billion of net income for the fourth quarter of last year, bringing its total annual profit to $7.6 billion in 2022. Analysts had expected UBS would achieve a net income of $1.3 billion in the fourth quarter and of $7.3 billion for the year, according to Refinitiv data.

Looking ahead, the Swiss lender said that revenues for the first quarter of 2023 are set “to be positively influenced” by higher client activity and interest rates, as well as by the easing of Covid-19 restrictions in Asia.

“We delivered good full-year and solid fourth-quarter results in a difficult macroeconomic and geopolitical environment,” CEO Ralph Hamers said in a statement.

Here are a couple of highlights from the latest release:

  • CET 1 capital ratio, a measure of bank solvency, stood at 14.2%, down from 14.4% in the previous quarter;
  • Revenues dropped to $8.029 billion from $8.705 billion a year ago;
  • Return on tangible equity, a measure of bank’s performance, rose to 13.2% at the end of the quarter, up from 10% a year ago.

Among the bank’s units, Global Wealth Management posted a fourth-quarter net interest income increase of 35% on the year, given higher deposit margins off the back of higher interest rates. Personal and Corporate Banking also recorded a 21% year-on-year hike in net interest income over the same period, as a result of higher interest rates and loan revenues.

But market uncertainty hit the investment banking and asset management arms of the business. The former saw a 24% yearly drop in revenues, whereas asset management revenues fell by 31% year-on-year due to the “negative market performance and foreign currency effects.”

“The rate environment is helping the business on one side, and that offsets some of the lower activity that we see on the investment side,” Hamers told CNBC’s Geoff Cutmore on Tuesday.

He added that, following the first half of last year, there was a shift in the markets that put pressure on the investment side of the bank.

“We saw a move from what we would call micro focus, which is equity focused, to macro focus, which is rates focused,” he said, noting that the Swiss bank was not able to benefit from that transition as much as some of its peers, given its smaller presence in the U.S.

‘Uncertain’ Outlook

UBS said it will be purchasing more shares this year.

“We remain committed to a progressive dividend and expect to repurchase more than $5 billion of shares in 2023,” Hamers said in a statement.

However, the Swiss bank is cautious about the economic outlook, citing central bank activity as a potential catalyst for market volatility.

“While inflation may have peaked in the second half of 2022, and an energy crisis in Europe seems likely to be averted, the outlook for economic growth, asset valuations and market volatility remains highly uncertain, and central bank tightening may have an impact on market liquidity,” the bank said in its latest results.

UBS shares are up by about 15% over the last 12 months.

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Business

IMF hikes global growth forecast as inflation cools

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The IMF has revised its global economic outlook upwards.

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The International Monetary Fund on Monday revised upward its global growth projections for the year, but warned that higher interest rates and Russia’s invasion of Ukraine would likely still weigh on activity.

In its latest economic update, the IMF said the global economy will grow 2.9% this year — which represents a 0.2 percentage point improvement from its previous forecast in October. However, that number would still mean a fall from an expansion of 3.4% in 2022.

It also revised its projection for 2024 down to 3.1%.

“Growth will remain weak by historical standards, as the fight against inflation and Russia’s war in Ukraine weigh on activity,” Pierre-Olivier Gourinchas, director of the research department at the IMF, said in a blog post.

The outlook turned more positive on the global economy due to better-than-expected domestic factors in several countries, such as the United States.

“Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe,” Gourinchas said, also noting that inflationary pressures have come down.

In addition, China announced the reopening of its economy after strict Covid lockdowns, which is expected to contribute to higher global growth. A weaker U.S. dollar has also brightened the prospects for emerging market countries that hold debt in foreign currency.

However, the picture isn’t totally positive. IMF Managing Director Kristalina Georgieva warned earlier this month that the economy was not as bad as some feared “but less bad doesn’t quite yet mean good.”

“We have to be cautious,” Georgieva said during a CNBC-moderated panel at the World Economic Forum in Davos, Switzerland.

The IMF on Monday warned of several factors that could deteriorate the outlook in the coming months. These included the fact that China’s Covid reopening could stall; inflation could remain high; Russia’s protracted invasion of Ukraine could shake energy and food costs even further; and markets could turn sour on worse-than-expected inflation prints.

IMF calculations say that about 84% of nations will face lower headline inflation this year compared to 2022, but they still forecast an annual average rate of 6.6% in 2023 and of 4.3% the following year.

As such, the Washington, D.C.-based institution said one of the main policy priorities is that central banks keep addressing the surge in consumer prices.

“Clear central bank communication and appropriate reactions to shifts in the data will help keep inflation expectations anchored and lessen wage and price pressures,” the IMF said in its latest report.

“Central banks’ balance sheets will need to be unwound carefully, amid market liquidity risks,” it added.

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European Central Bank member says market is mispricing rate hikes, expects more to come

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Klaas Knot, president of De Nederlandsche Bank spoke with CNBC in Davos.

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DAVOS, Switzerland — The European Central Bank will not stop with one single 50 basis point hike at its next rate-setting meetings, a board member told CNBC Thursday.

“It will not stop after a single 50 basis point hike, that’s for sure,” Klaas Knot, who serves as the governor of the Dutch central bank, said regarding the ECB’s upcoming moves.

The European Central Bank raised rates four times throughout 2022, bringing its deposit rate to 2%. The central bank in December said it would be increasing rates further in 2023 to address sky-high inflation.

Recent data has shown a slowdown in headline inflation, even if it remains well above the ECB’s 2% target.

December inflation came in at 9.2% in the euro zone, according to preliminary numbers. This was the second consecutive monthly drop in price rises across the euro zone. However, Knot doesn’t think all of the recent data is “encouraging.”

“What we have seen thus far is data that is not encouraging from our end,” he said at the World Economic Forum in Davos.

“We have seen one more inflation reading where there were no signs of abating of [the] underlying inflationary pressures. So we have to do what we’ll have to do, and core inflation has not yet turned the corner in the euro area and that means the market developments I have seen in, let’s say, last two weeks or so are not entirely welcomed from my perspective. I don’t think they are compatible actually with a timely return of inflation toward 2%,” Knot said.

Market players are expecting the ECB to raise rates at its next meeting in February. The wider question is whether the central bank gets too aggressive with its policy tightening and restricts economic growth. However, Know has made it clear that there will be at least two more rate hikes.

“Most of the ground that we have to cover, we will cover at a constant pace of multiple 50 basis points hikes,” he said.

“Where that sort of pace of 50 basis points hikes is going to end I cannot say beforehand, but it is very clear that our president has used the plural in her wordings, I am using the plural here. So it will not stop after a single 50 bps hike, that’s for sure.”

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Business

Inflation euro zone December 2022 drops as energy costs ease

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Inflation in Europe has been impacted by higher energy prices and supply shortages. Analysts question how far central banks will go to bring inflation under control.

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Inflation in the euro zone dropped for a second consecutive month in December, but analysts do not expect it to spark a change in tone from the European Central Bank.

Headline inflation, which includes food and energy costs, came in at 9.2% year-on-year in December, according to preliminary data Friday from the European statistics agency, Eurostat. It follows November’s headline inflation rate of 10.1%, which represented the first slight contraction in prices since June 2021.

The euro area economy has come under immense pressure in the wake of Russia’s invasion of Ukraine in February 2022, with energy and food costs soaring last year. In an effort to battle rising prices, the European Central Bank increased interest rates four times in 2022 and said it is likely to continue doing so this year. The bank’s main rate currently sits at 2%.

Despite further signs that inflation is easing, analysts say it is too early to celebrate and do not expect a pivot from the region’s central bank.

Interest rates will “get to 3(%) and probably have to hold that all through the year even as the recession becomes more and more evident,” Hetal Mehta from Legal & General Investment Management told CNBC’s “Street Signs” Thursday.

It comes after ECB President Christine Lagarde struck a particularly hawkish tone in December: “We’re not pivoting, we’re not wavering, we are showing determination.” She added that the bank has “more ground to cover.”

The ECB cannot and will not base its policy decisions on highly volatile energy prices.

Carsten Brzeski

global head of macro, ING Germany

Speaking earlier this week, ECB Governing Council member and French Central Bank Governor Francois Villeroy de Galhau said interest rates might peak by this summer.

The ECB also said in December that it will start reducing its balance sheet in March at a pace of 15 billion euros ($15.8 billion) per month until the end of the second quarter. This step is also expected to address some of the region’s inflationary pressures.

At the time, the central bank forecast an average inflation rate of 8.4% for 2022, 6.3% for 2023 and 3.4% for 2024. The bank’s mandate is to work toward a headline inflation figure of 2%.

Earlier this week, data out of Germany showed inflation dropping from 10% in November to 8.6% in December.

Carsten Brzeski, global head of macro at ING Germany, said these numbers “are not a relief, yet, only a reminder that euro zone inflation is still mainly an energy price phenomenon.”

Energy costs have dropped in Europe in recent months. Natural gas prices, for instance, traded at around 72.42 euros per megawatt hour on Friday — sharply lower than their peak of 349.90 euros per megawatt hour in August.

Among inflation components, energy continued to represent the biggest driver in December, but came off from previous levels. Energy costs dropped from 34.9% in November to an estimated 25.7% in December, according to the latest figures.

“The ECB cannot and will not base its policy decisions on highly volatile energy prices. Instead, the central bank will, in our view, hike interest rates at the next two meetings by a total of 100 basis points,” Brzeski said in a note.

Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics, also said in a note this week that he sees “little relief” in the inflation data, “which will keep the ECB on alert at the start of the year.” He expects two rate hikes of 50 basis points in the first quarter.

In terms of national breakdown, the Baltic nations once again registered the highest jumps in inflation, with a rate of about 20%.

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Business

Russian oil sanctions are about to kick in. And they could disrupt markets in a big way

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European oil sanctions are due to kick in on December 5. The idea is to reduce oil revenues for Russia given its war in Ukraine.

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Upcoming sanctions on Russian oil are set to be “really disruptive” for energy markets if European nations fail to set a cap on prices, analysts warned.

The 27 countries of the European Union agreed in June to ban the purchase of crude oil from Dec. 5. In practical terms, the EU — together with the United States, Japan, Canada and the U.K. — want to drastically cut Russia’s oil revenues in a bid to drain the Kremlin’s war chest following its invasion of Ukraine.

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However, concerns that a complete ban would send crude prices soaring led the G-7 to consider setting a cap on the amount it will pay for Russian oil.

An outright ban on Russian imports could be “really disruptive” to markets, according to Henning Gloystein, director of energy, climate and resources at political risk consultancy Eurasia Group.

The potential for rising oil prices is “why there’s pressure from the U.S.” to agree on a cap, Gloystein told CNBC Wednesday.

A price limit would see G-7 nations buy Russian oil at a lower price, in an effort to reduce Russia’s oil income without raising crude prices across the globe.

However, EU nations have been in dispute for several days over the right level to cap prices.

The right oil cap

A proposal discussed earlier this week suggested a limit of $62 a barrel, but Poland, Estonia and Lithuania refused to agree to it, arguing it was too high to dent Russia’s revenues. These nations have been among the most vocal in pushing for action against the Kremlin for its aggressions in Ukraine.

Speaking to CNBC’s Julianna Tatelbaum Wednesday, the Dutch energy minister said a cap on Russian oil prices was “a very important next step.”

“If you want effective sanctions that are really hurting the Russian regime, then we need this oil cap mechanism. So hopefully we can agree on it as soon as possible,” Rob Jetten said.

On Wednesday, Russian oil traded at about $66 a barrel. Officials at the Kremlin have repeatedly said that a price cap is anti-competitive and they will not sell their oil to countries that have implemented the cap.

They’re hoping that other major buyers — such as India and China — won’t agree to the limit and so will continue to purchase Russian oil.

China and India

G-7 nations agreed to impose a limit on Russian oil back in September, and have been working on the details ever since. At the time, the EU’s energy chief, Kadri Simson, told CNBC she was hoping China and India would support the price cap too.

Both nations stepped up their purchases of Russian oil following Moscow’s invasion of Ukraine, benefiting from discounted rates. Their participation is seen as essential if the restrictions on Russian oil are to work.

“China and India are crucial as they buy the bulk of Russian oil,” Jacob Kirkegaard, senior fellow at the Peterson Institute For International Economics, told CNBC.

“They won’t commit, however, for political reasons, as the cap is a U.S.-sponsored policy and [for] commercial reasons, as they already get a lot of cheap oil from Russia, so why jeopardize that? Thinking they would voluntarily join was always naive as Ukraine is not that important to them.”

India’s Petroleum Minister Shri Hardeep S Puri told CNBC in September he has a “moral duty” to his country’s consumers. “We will buy oil from Russia, we will buy from wherever,” he added.

As such, there are growing doubts about the true impact of the restrictions on Russia.

“Energy sanctions against Russia have come too late and are too timid,” Guntram Wolff, director at the German Council on Foreign Relations, said via email.

“This is just a continuation of an unfortunate series of timid decisions. The longer and later the sanctions come, the easier it will be for Russia to circumvent them.”

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World

Europe shows a united front against Biden’s Inflation Reduction Act

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German Federal Minister of Finance Christian Lindner (L) and French Minister of the Economy, Finance and Recovery Bruno Le Maire (R) both criticized the U.S. inflation reduction act for discriminating against European companies.

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EU member states are standing resolutely firm against President Joe Biden’s Inflation Reduction Act amid fears it will harm their domestic companies and economies.

The sweeping U.S. legislation, which was approved by U.S. lawmakers in August and includes a record $369 billion in spending on climate and energy policies, was discussed by the 27 European Union finance ministers on Tuesday. This came after the European Commission, the executive arm of the EU, said there are “serious concerns” about the design of the financial incentives in the package.

“Each minister agreed that this is a subject of concern at the European level and that we need to see what is the best response,” an EU official, who followed the ministers’ discussions but preferred to remain anonymous due to the sensitive nature of the issue, told CNBC.

The same official added that “there is a political consensus (among the 27 ministers) that this plan threatens the European industry.”

The EU has listed at least nine points in the U.S. Inflation Reduction Act that could be in breach of international trade rules. One of the biggest sticking points for the Europeans is the tax credits granted for electric cars made in North America. This could bring challenges to European carmakers that are focusing on EVs, such as Volkswagen.

“That’s what we’re eventually seeking: that the EU should be, as a close ally of the U.S., in a position which is more similar to that of Mexico and Canada,” Valdis Dombrovskis, the EU’s trade chief, said at a news conference Tuesday.

We don’t want to see any kind of decision that could harm this level playing field.

Bruno Le Maire

France Finance Minister

South Korean officials have also raised similar concerns to Europe, given the set of measures in the U.S. could also restrict Hyundai and others from doing business in America.

A second EU official, who also followed the ministers’ discussions but preferred to remain anonymous due to the sensitive nature of the issue, said the conversations were “not very deep” — highlighting unity among the ministers on a broader level.

The same official said that France’s finance minister, Bruno Le Maire, told his counterparts that he was not asking for a strong negative decision against the EU’s American friends, but rather asking for a “wake-up call” for his European counterparts who need to protect the interests of European businesses.

Earlier on Monday, Le Maire told CNBC, “We need to be very clear, very united, and very strong from the very beginning explaining [to] our U.S. partners [that] what’s at stake behind this Inflation Reduction Act is the possibility to preserve the level playing field between the United States and Europe.”

“The level playing field is at the core of the trade relationship between the two continents and we don’t want to see any kind of decision that could harm this level playing field,” he said.

French officials have for a long time advocated for strategic independence — the idea that the EU needs to be more independent from China and the U.S., for instance, by supporting its own industry. Last month, French President Emmanuel Macron suggested that the EU should also look at a “Buy European Act” to protect European carmakers.

“We need a Buy European Act like the Americans, we need to reserve [our subsidies] for our European manufacturers,” Macron said in an interview with broadcaster France 2, adding, “You have China that is protecting its industry, the U.S. that is protecting its industry and Europe that is an open house.”

A taskforce between European and American officials, which had its first meeting on this subject last week, will now meet every week to discuss how to address Europe’s concerns over the Inflation Reduction Act.

The idea is “to continue promoting deeper understanding of the law’s meaningful progress on lowering costs for families, our shared climate goals, and opportunities and concerns for EU producers,” the White House said in a statement.

Despite the regular contact, U.S. officials are dealing with the midterm elections and the Inflation Reduction Act has already been legislated, meaning that any changes would have to come during the implementation phase.

Fredrik Erixon, director of the European Centre for International Political Economy, told CNBC that “it is obvious that the EU has legitimate concerns about the Inflation Reduction Act and direct and indirect discrimination in it.”

“Many of IRA policies that take a ‘America first’ attitude will hurt competition and EU firms, and especially so in sectors where the EU is competitive, not least green industries and cleantech. The EU may go to the WTO [World Trade Organization] to sort these issues out but it is far more interested to get them addressed bilaterally,” he added.

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Business

Euro zone inflation hits 10.7% in October

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Inflation in the euro zone remains extremely high. Protestors in Italy used empty shopping trolleys to demonstrate the cost-of-living crisis.

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Euro zone inflation rose above the 10% level in the month of October, highlighting the severity of the cost-of-living crisis in the region and adding more pressure on the European Central Bank.

Preliminary data on Monday from Europe’s statistics office showed headline inflation came in at an annual 10.7% last month. This represents the highest ever monthly reading since the euro zone’s formation. The 19-member bloc has faced higher prices, particularly on energy and food, for the past 12 months. But the increases have been accentuated by Russia’s invasion of Ukraine in late February.

This proved to be the case once again, with energy costs expected to have had the highest annual rise in October, at 41.9% from 40.7% in September. Food, alcohol and tobacco prices also rose in the same period, jumping 13.1% from 11.8% in the previous month.

“Inflation surged again in October and are a proper Halloween nightmare for the ECB,” analysts at Pantheon Macroeconomics, said in an email.

Salomon Fiedler, an economist at Berenberg, said the “continuing surge in consumer prices and still-resilient domestic demand in the summer indicate a risk that the European Central Bank may hike rates by 75 basis points in December, rather than the 50 basis points we currently expect.”

Italy’s inflation above 12%

Monday’s data comes after individual countries reported flash estimates last week. In Italy, headline inflation came in above analysts’ expectations at 12.8% year-on-year. Germany also said inflation jumped to 11.6% and in France the number reached 7.1%. The different values reflect measures taken by national governments, as well as the level of dependency that there nations have, or had, on Russian hydrocarbons.

There are, however, euro nations where inflation rose by more than 20%. This includes Estonia, Latvia and Lithuania.

The European Central Bank — whose primary target is to control inflation — on Thursday confirmed further rate hikes in the coming months in an attempt to bring prices down. It said in a statement that it had made “substantial progress” in normalizing rates in the region, but it “expects to raise interest rates further, to ensure the timely return of inflation to its 2% medium-term inflation target.”

The ECB decided to raise rates by 75 basis points for a second consecutive time last week.

Speaking at a subsequent press conference, ECB President Christine Lagarde said the likelihood of a recession in the euro zone had intensified.

Growth figures released Monday showed a GDP (gross domestic product) figure of 0.2% for the euro area in October. This is after the region grew at a rate of 0.8% in the second quarter. Only Belgium, Latvia and Austria registered GDP rates below zero.

So far, the 19-member bloc has dodged a recession but an economic slowdown is evident. Several economists predict there will be a contraction in GDP during the current quarter.

Andrew Kenningham, chief Europe economist at Capital Economics, said “the increase in euro zone GDP in the third quarter does not alter our view that the euro zone is on the cusp of a recession.”

“But with inflation having jumped to well over 10%, the ECB will prioritise price stability and press on with rate hikes regardless,” he added.

The euro traded below parity against the U.S. dollar in early European trading hours Monday and ahead of the new data releases, and barely moved after the new figures. The euro has been weaker against the greenback and that’s also something the ECB has been concerned about with concerns that this will push up inflation in the euro zone even further.

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Business

75 bps hike expected but TLTROs and QT on the table

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Christine Lagarde, president of the European Central Bank, is expected to announce another 75 basis points hike.

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While the European Central Bank is largely expected to announce another rate hike Thursday, market players are seemingly more concentrated on two other policy tools as the region edges toward a recession.

The central bank has been contemplating inflation being at record highs but an economy that is slowing, with many economists predicting a recession before the end of the year. If the ECB takes a very aggressive stance in increasing rates to deal with inflation, there are risks that it tips the economy into further trouble.

Amid this context, the ECB is widely seen raising rates by 75 basis points later this week. This would be the second consecutive jumbo hike and the third increase this year.

“The ECB will likely raise its three policy rates by 75 basis points and suggest that it will go further at its next few policy meetings without providing a clear guidance on the size and number of steps to come,” Holger Schmieding, chief economist at Berenberg, said in a note Tuesday.

Given the inflationary pressures — the September inflation rate came in at 10% — analysts are pricing in at least another 50 basis point hike in December. The bank’s main rate is currently at 0.75%.

“A growing consensus seems to be in favour of having the deposit rate at 2% by the end of the year, implying a 50 basis point hike in December, with a reassessment of the economic and inflation outlook in early 2023,” Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said in a note Friday.

Two big questions

Rates aside, there are two questions on the minds of market players that need answering: When will the ECB start unwinding its balance sheet, in a process known as quantitative tightening, and what will happen to the lending conditions for banks in the near future. The ECB has undertaken years of quantitative easing, where it buys assets like government bonds to simulate demand, following the euro crisis of 2011 and the Covid-19 outbreak in 2020.

“When it comes to QT, boring is beautiful,” Ducrozet said, adding that he expects the process to start in the second quarter of 2023. QT is expected “to be predictable, gradual, and passive, starting with the end of reinvestments under the Asset Purchase Programme (APP) but not actively selling bonds any time soon,” he said.

Camille De Courcel, head of European rates strategy at BNP Paribas, said in a note Monday that the central bank might wait until the December meeting to provide details on QT but that it is likely to start reducing its balance sheet by about 28 billion euros on average per month when it does happen.

But perhaps the biggest uncertainty at this stage is whether lending conditions will change for European banks.

“We think Thursday [the ECB] will unveil a decision on the TLTRO, either its remuneration, or its cost. We think the new measure will only come into effect, in December,” De Courcel said.

The targeted longer-term refinancing operations, or TLTROs, is a tool that provides European banks with attractive borrowing conditions — hopefully giving these institutions more incentives to lend to the real economy.

Because the ECB has been increasing rates faster than the central bank initially expected, European lenders are benefiting from the attractive loan rates via TLTROs while also making more money from the higher interest rates.

“The optics are bad against the backdrop of a historical shock to households’ income, and political pressure cannot be ignored,” Ducrozet said.

The euro traded marginally higher against the U.S. dollar on Wednesday at $0.997. The weakness of the common currency has been a concern for the central bank though it repeatedly states that it does not target the exchange rate.

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Business

Deutsche Bank earnings Q3 2022

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Deutsche Bank on Wednesday crushed market expectations for the third quarter, amid higher interest rates and turbulent market trading.

The bank reported a net income of 1.115 billion euros ($1.11 billion) for the quarter. Analysts had predicted a net profit of 827 million euros, according to data from Refinitiv.

“We are seeing the benefit of interest rates come through in our corporate bank and private bank, essentially those with large deposit books and we are seeing our FIC [fixed income and currencies] business managing this environment extremely well,” James von Moltke, CFO of Deutsche Bank, told CNBC’s Joumanna Bercetche.

CEO Christian Sewing said in a statement that the bank is “well on track” to meet its 2022 goals. In the medium term, the bank said it aims to achieve returns on average tangible equity to above 10% by 2025.

Here are other highlights for the quarter:

  • Revenues rose 15% from a year ago, and hit 6.92 billion euros.
  • Common Equity Tier 1 ratio, a measure of bank solvency, stood at 13.3% from 13% a year ago.

Deutsch Bank reported earnings for the third quarter.

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Looking at the bank’s individual divisions, investment banking revenues increased 6% from a year ago. In particular, revenues in Fixed Income and Currencies were up by 38% over the same period and helped offset lower performance in Credit Trading.

Within this context, the bank said revenues in Origination and Advisory dropped 85% year on year, pointing to lower deal making — as has been the case with some of its U.S. peers.

Corporate Banking, however, saw the biggest jump in revenues among all divisions, up by 25% from a year ago.

Deutsche Bank also said it had further reduced its exposure to Russian credit over the same period. The bank has been cutting its ties with Russia in the wake of Moscow’s unprovoked invasion of Ukraine. As a result, additional contingent risk fell to 0.2 billion euros, from the 0.6 billion euros at the end of the second quarter. 

Higher interest rates for longer?

The German bank reported higher provisions in comparison to the same quarter a year ago. These came in at 350 million euros at the end of the third quarter, compared to 117 million euros at this time last year.

The bank said these reflected a “more challenging macroeconomic forecasts.” Speaking to CNBC, von Moltke reiterated his expectation of a recession in 2023 in Germany and the broader European market.

Despite the poor growth expectations, Deutsche Bank believes the European Central Bank will continue to hike rates. At the moment, the main ECB rate stands at 0.75%.

“We do think terminal rates have now begun to converge towards our view and that would probably be more like 3% for the ECB and 5% maybe 5.5% … for the Fed. I think that’s important because the critical thing is to get inflation under control and therefore we are entirely supportive of the central bank actions,” von Moltke said.

Shares of Deutsche Bank are down about 17% so far this year. The German lender beat expectations back in the second quarter with a profit of 1.046 billion euros.

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