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The week in review: the European central bank cuts rates

Market Activity

The week in review: the European central bank cuts rates

June 9, 2024

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The ECB reduced its deposit rate this week by a quarter point to 3.75%, as expected, but it stopped short of indicating that more cuts could follow. “Based on an updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission, it is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady,” the Governing Council said in a statement.

However, reading from the statement at a press conference, ECB President Christine Lagarde added: “We are not pre-committing to a particular rate path. Despite the progress over recent quarters, domestic price pressures remain strong as wage growth is elevated, and inflation is likely to stay above target well into next year.”

The ECB forecast that inflation would average 2.5% in 2024, an upward revision from the previous estimate of 2.3%. The central bank also revised its estimate of average inflation for 2025 to 2.2% in 2025 from 2.0% but held its forecast for 2026 at1.9%.

The ECB president also highlighted that underlying inflation slowed again in April and that company profit margins were starting to absorb wage growth. She also said that the Governing Council’s confidence in the inflation forecast drove the ECB’s decision.

Lagarde said that the road ahead will be bumpy, implying that policymakers will change with the data. Wieladek sees the potential for two additional rate cuts this year, most likely in September and December — although this purely data-dependent approach means that there might only be one.

Denmark's central bank lowered its benchmark rate by a quarter point to 3.35%, following the ECB’s move.

This follows cuts fromSweden, Canada and Switzerland. We expect, and hope, the UK will follow suit fairly soon.

In Europe

The pan-European STOXX Europe 600 Index ended 1.04% higher after the European Central Bank (ECB) on Thursday cut interest rates for the first time in five years. Major stock indexes recorded gains. Italy’s FTSE MIB rose 0.49%, Germany’s DAX tacked on 0.32%, and France’s CAC 40 Index added 0.11%.

The FTSE 100 was down 0.48% at 8,245.37, while the FTSE 250 index was even lower declining 0.77% to 20,555.37.

GBP/USD meanwhile was down 0.56% to 1.2720 and the yield on the benchmark 10-year Gilt climbed nine basis points to 4.264%.

According to the latest Halifax house prices data released Friday, house prices were largely unchanged last month as the market continued to stabilise.

Average house prices were "static" in May, down just 0.1% on a monthly basis. On an annual basis, house price growth was 1.5%, up from 1.1% in April.

In the US

In the US the major indexes ended mixed for the week, as investors appeared to weigh contradictory data from the week’s busy economic calendar. The S&P 500 Index and technology-heavy Nasdaq Composite reached record intraday highs, but the smaller-cap indexes pulled back. Relatedly, growth stocks outpaced value shares by the widest amount since early in the year, as falling longer-term interest rates increased the notional value of future earnings.

Traders observed that some of the steam seemed to come out of the fast-growing artificial intelligence (AI )sector, however. News arrived that U.S. officials have slowed the issuing of licenses to chipmakers for AI chip sales to the Middle East and were opening antitrust investigations into Microsoft and NVIDIA over their dominance of AI.

The start of the week brought some downbeat economic readings, which appeared to lead to a return of worries about slowing growth alongside high inflation — or “stagflation” — among some investors, according to our traders. In particular, the Institute for Supply Management (ISM) reported on Monday that its gauge of manufacturing activity had fallen further into contraction territory (48.7, with levels below 50.0 indicating contraction).

On Tuesday, the Labor Department reported that job openings in April had fallen to their lowest level (8.059 million) since February 2022. Conversely, the number of Americans leaving their jobs voluntarily, the so-called quits rate — considered by many as a more reliable indicator of the strength of the labour market — surprised on the upside.

In Asia

Japan’s stock markets generated mixed weekly returns, with the Nikkei 225 Index up 0.5% and the broader TOPIX Index falling 0.6%. A tentative rally in the yen, which strengthened to around JPY 155 against the U.S. dollar, from the prior week’s JPY 157, posed a headwind for Japanese exporters. However, the latest purchasing managers’ index data showing that the country’s services sector continued to expand at a sharp pace in May lent support to sentiment. There were also some signs that private consumption could stop being a drag on growth, as household spending increased year on year in April, the first increase in 14 months.

Stocks in China retreated despite data showing that the property sector may be gaining traction. The Shanghai Composite Index declined 1.15%, while the blue-chip CSI 300 Index gave up 0.16%. In Hong Kong, the benchmark Hang Seng Index rose 1.59%, according to FactSet.

The value of new home sales by the country’s top 100 developers rose 11.5% in May, up from April’s 3.4% increase, according to the China Real Estate Information Corp. New home sales slumped 33.6% in May from a year ago but eased from April’s 45% decline. The data boosted hopes that China’s property market downturn, now in its fourth year, may start to recover after Beijing announced a rescue package in May to stabilise the struggling sector. However, some analysts remained sceptical about whether the measures will result in a sustainable housing recovery amid weak domestic demand.

The week ahead

Global economies have started to shift into a lower interest rate environment after both Canada, Denmark and the EU voted to cut rates at their meetings last week, joining Sweden and Switzerland.

Attention will now turn to the US and the Federal Reserve, which meets for its interest rate meeting on Wednesday.

Current estimates see no chance of rates being cut and following stronger-than-expected jobs data, there are concerns across the market that a September cut is no longer a possibility.

Before the US interest rate announcement we will see the latest inflation figures. This is going to be an exciting release as always. Headline inflation on the month is expected to be 0.2% while core the market sees coming in slightly higher at 0.3%. Any higher than this will put more spanners in the works for future rate cut expectations.

Over in the UK, attention will turn to GDP figures for April, with both political parties likely to scrutinise the data in their favour.

After March saw 0.4% month-on-month growth, April is forecast to have eased back to 0.2%, the same as February.

In equities, an update from Tesco will offer insight into the UK’s battle with inflation, with the effect of the slowing of price increases at the leading supermarket expected to feature.

There are also results from several companies which could face scrutiny or changes under a new government.

FirstGroup, the train operator, will publish its annual results in the unusual position of knowing its UK rail business will be nationalised within the next parliament if Labour is elected.

Pennon Group’s annual report could also face criticism from politicians should its chief executive receive an annual bonus.

Its subsidiary South West Water was forced to apologise last month for a diarrhoea outbreak at the Devon fishing town of Brixham!

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