Eurozone gross domestic product for the first quarter of 2022 was revised sharply higher on 8 June, with Eurostat's second estimate showing growth of 0.6% quarter-on-quarter, three times the preliminary 0.2% reading. The upgrade arrived a day before the European Central Bank's Governing Council meeting, where policymakers moved to formally end asset purchases and open the door to the bloc's first rate hike in over a decade. Together, the two events marked a pivotal week for eurozone monetary policy as inflation surged to record highs.
The GDP Revision in Detail
Eurostat's second estimate put eurozone GDP growth at 0.6% for the first quarter of 2022, up from the preliminary flash estimate of 0.2% published in late April. Employment also rose 0.6% over the same period, pointing to a resilient labour market even as energy costs climbed. The upward revision reflected stronger-than-expected household spending and a rebound in services activity as pandemic restrictions eased across the bloc. It offered some reassurance that the eurozone economy retained momentum despite the shock from Russia's invasion of Ukraine and the resulting spike in energy and food prices.
Inflation Forces the ECB's Hand
The GDP upgrade came against a backdrop of accelerating inflation, with the flash estimate for May 2022 showing eurozone HICP inflation at a record 8.1% year-on-year, up from April's already-record 7.4% and marking the seventh consecutive monthly high, driven largely by energy and food costs tied to the war in Ukraine. At its 9 June meeting, the ECB Governing Council confirmed that net purchases under its asset purchase programme would end on 1 July, and it signalled a 25 basis point rate increase at the July meeting, with a larger move possible in September if the inflation outlook failed to improve. Updated staff projections put 2022 inflation at 6.8% and GDP growth at 2.8%.
Bond Yields and the Euro React
Government bond yields across the eurozone climbed as markets absorbed the prospect of the first ECB rate rise since 2011, with peripheral spreads, particularly Italian BTPs over German Bunds, widening as investors weighed fragmentation risk in a tightening cycle. The euro found some support against the dollar on the prospect of narrowing rate differentials with the Federal Reserve, though gains were capped by concerns that aggressive tightening could choke off growth just as the upgraded GDP data suggested resilience. Equity markets in the region traded cautiously, with rate-sensitive sectors underperforming as borrowing cost expectations rose.
What It Means for Traders
The combination of firmer growth data and a hawkish ECB pivot set the tone for a volatile summer in European markets. For traders, the widening gap between peripheral and core eurozone bond yields became a key risk indicator, while EUR/USD positioning increasingly tracked the relative pace of ECB and Fed tightening. Scheduled events, including subsequent ECB meetings and eurozone inflation releases, took on outsized importance for short-term volatility. Building a calendar around these catalysts, rather than reacting to headlines in real time, remained the more disciplined approach to navigating the shift away from a decade of ultra-loose policy.
Daily market analysis by BCM Markets.