ECB preparedness and Warsh's credibility test (with Tom, Guy, Anna)

ECB is well-prepared for another inflation surge via scenario analysis; expects another 1-2 hikes this year due to geopolitical risks. Warsh faces a credibility test between being a mainstream central banker and loyalty to Trump. AI poses financial stability risks more in the US than Europe. ECB communication is settled; Warsh's reluctance to use forward guidance may increase volatility.

explicit

implicit

RUT

explicit

Metals

USD

2.5
Other
Birgit Niessner 8.5

ECB preparedness and Warsh's credibility test (with Tom, Guy, Anna)

ndx

She says AI bubble is a US problem with exuberance in capital markets; if it bursts, it would hit US tech stocks. European exposure is limited.

wti

There will be more volatility coming from the Strait of Hormuz.

yields

I expect another hike this year, maybe even two.

What will the relationship be like when ECB members meet Warsh?

Tom
Birgit Niessner

They don't know each other well. They were cozy with Powell. Warsh still has to gain credibility and they want to find out if he is a mainstream central banker or a political appointment.

The independence test will come in autumn when we see volatility in energy and food prices.
Do you think central banks have lost control of the inflation narrative?

Guy
Birgit Niessner

Not all in one basket. ECB has come down to target; US has been above target for five years. ECB's strategy assessment and scenario analysis tools make them well-prepared for the next surge.

I see another inflation surge coming, not as big as post-pandemic, but not one you can look through.
Do you think we might see another ECB hike? Was the first hike a policy mistake?

Anna
Birgit Niessner

I expect another hike this year, maybe even two. I'm pessimistic on geopolitics. With inflation forecast at 3%, clearly above target, and inflation expectations shaped by the recent episode, another hike is coming.

The ECB's formulation of 'measured additional tightening' makes sense.
Does the ECB rethink its communication based on the Fed's shift?

Anna
Birgit Niessner

ECB is well-settled with its communication. Warsh's reluctance to use mainstream tools like dot plots and press conferences may lead to higher volatility.

The market will need to learn to read him.
Is AI a risk to financial stability? Are central banks prepared?

Tom
Birgit Niessner

AI is on the agenda at Sintra. Currently we see the inflationary effect via data centers and electricity costs. Financial stability risks are more a US problem; European banks are not as exposed.

We see exuberance in US capital markets; we hope it's solid, but the risk is materializing in the US, not Europe.

SignalTube

markets at a glance