Inflation has been sticky, and the economy has been more resilient to interest-rate hikes than feared. Yet the market consensus has moved to price in a central bank pivot after an unprecedented U-turn in monetary policy earlier this year. Media reports support the pivot case, while some opinion leaders beg to differ. It helps that the US Federal Reserve will follow up at its meeting this week.

As for the growth/inflation mix, leading indicators will reveal whether the resilience of the economy extends into winter. And most importantly, non-farm payroll numbers will show whether the first cracks have appeared in the immaculate US labour-market mirror.

Hence, investors who followed the suggestion and dared to buy into the panic lows last month are now sitting on a 10% gain in US stocks. Before investing further, it is worthwhile to look at the data coming out this week, as outlined above. Another 400 large-cap companies are also due to report numbers this week. What has struck us regarding this corporate earnings season is how severely earnings and sales misses are punished these days.

While more than two out of three companies deliver on expectations, the one that does not gets hit hard. The other take-away is that Europe has outpaced the US in terms of earnings surprises. This by no means shows that European corporates are more resilient than their US counterparts.

Rather, it emphasises that we are experiencing a unique earnings season: the weak European currency, in combination with ultra-high inflation rates, leads to an ever more extreme divergence between the nominal and real worlds. And corporates perform in the nominal world, where volumes went up by 10% or more, as did corporate sales. The weak euro thus helps to save margins.

Macroeconomics and market timing aside, the good news is that equities with superior growth are available at reasonable prices.

Is the ECB approaching the end of interest-rate tightening?

On 27 October, the ECB fulfilled market expectations by hiking its policy rates by a full 75bps (deposit rate to 1.5%, main refinancing rate to 2.0%). Quantitative tightening was left to debate and will likely only follow once interest-rate tightening is concluded. With this large rate hike, the ECB is prioritising the battle against inflation over growth risks while ignoring warning signals that the policy tightening it has provided so far has already slowed credit activity in the housing and consumer sectors.

The trimming of its forward guidance to a slightly less hawkish stance (i.e. the reference that hikes would continue for “several meetings” was dropped) suggests that the ECB is likelier to acknowledge growth risks and slow the pace of tightening at its December meeting. After we had pencilled in a lower 50bps hike last week, we now expect only a 25bps hike on 15 December and a hold from there on.

Economic data presented earlier this week, however, shows that eurozone headline inflation surged to 10.7% in October, suggesting that lower energy prices may kick in only as of the November data, while stronger core inflation (at 5.0%) points to a further broadening of inflation in non-energy goods. At the same time, Q3 gross domestic product data reported growth at 0.2% compared to Q2, which was a tick more robust than expected.

However, the growth trend is slowing, while high inflation is keeping recession risks for the winter months unchanged. Nevertheless, recent data suggests some upside risks to our below-consensus call of only 25bps in December, which relies on a turnaround of inflation in November and more signs of the impact of policy tightening until then.

As the ECB met expectations last week, the euro hardly moved. The ECB’s normalisation is so far providing only a mild tailwind for the euro, which is dominated by the prevailing risk aversion and high costs of energy imports.