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Most Americans know the Declaration of Independence. Almost nobody knows the
second document Joel Litman says matters just as much -and why it suddenly
matters again today.
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STRATEGY DESK




The European Central Bank Is Now Expected to Raise Rates in September — the
Iran War Is Going Global




The European inflation data published Tuesday has cemented what would have
been considered a surprising expectation just a month ago: the European Central
Bank is now nearly fully priced by markets for a 25-basis-point rate hike in
September, raising the ECB's deposit rate to 2.5% in response to Eurozone
inflation that accelerated to 3.3% in August, driven substantially by energy
costs that flow directly from the Iran war's disruption of Persian Gulf oil and
LNG supply.


Inflation in the euro area rose to 3.3% in August from 2.9% in July, the
European Union's statistics office Eurostat said Tuesday, with higher energy
costs a major driver, with energy inflation accelerating to 14.3% from 10.3%,
according to CNBC's stock market coverage. The release cemented market
expectations for the European Central Bank to raise interest rates in
September, with a 25 basis point move higher to 2.5% almost fully priced in
according to LSEG data.




KEY TAKEAWAYS

* Eurozone inflation accelerated to 3.3% in August — up from 2.9% in July —
with energy inflation rising to 14.3%, directly reflecting the Iran war's
disruption of Persian Gulf oil and LNG supplies, cementing September ECB rate
hike expectations to 2.5%.
* The ECB's expected September hike represents the global monetary policy
transmission of the Iran war: a bilateral U.S.-Israeli military action has
produced synchronized central bank tightening across the Atlantic, with
European homeowners and corporate borrowers paying the rate consequences.
* A European rate hike narrows the ECB-Fed interest rate differential that
has kept the dollar strong, affecting U.S. export competitiveness,
multinational earnings translation, and demand for dollar-denominated assets
from European investors.



The ECB's expected September hike represents the global monetary policy
transmission of the Iran war — a conflict that began as a bilateral
U.S.-Israeli military action and has produced synchronized central bank
tightening across the Atlantic. When the same energy price shock that requires
Warsh's Fed to consider a September hike also requires the ECB to actually
deliver one in September, the war's global monetary consequences become
measurable in interest rates paid by European homeowners, corporate borrowers,
and sovereign governments simultaneously.


For the United States, the ECB's hike has a specific secondary effect through
the dollar: a European rate hike that reduces the ECB-Fed rate differential
narrows the interest rate advantage that has kept the dollar strong relative to
the euro, which affects the competitiveness of American exports, the
translation of multinational earnings back to dollars, and the demand for
dollar-denominated assets from European investors who have been chasing the
dollar's yield advantage.




SOURCE:




* "Fed Chairman Warsh warns on inflation at Jackson Hole" — CNBC

 


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