Could an ECB rate cut change reverse this trend?
It might not be enough to offset some of teh structural issues the old continent is facing (overregulation, demographics, lack of tech innovation and energy dependence among others). Source: Bloomberg, Michel A.Arouet
BREAKING >>> ECB rates unchanged as expected but ECB gives quite explicit indication of coming rate cut in June - unless they are surprised. No rate cut size given.
Note also a Critical Change In The ECB's Language (UBS): "The ECB noted that wage pressures are moderating and those wage gains there are, are tending to be absorbed by companies in their profits. That is something ECB President Lagarde said a month ago was a prerequisite – indeed it was a worrisome signal as far as equity was concerned, specifically requiring lower profit margins. But contrast today's wording with last month's: that inflation remained high because in part of high wages. So, having set up a margin squeeze on wage absorption as a critical requirement, Lagarde should draw attention to that in the press conference". The first indication out of today’s ECB governing body meeting is consistent with President Lagarde’s previous statment that the Eurozone’s central bank is not “Fed dependent.” Source: Piet Haines Christiansen
A Pivotal Moment Between the ECB and the Fed?
This week unfolds as a critical juncture for the interest rate disparity between the US and Europe. As the spread between the 5-year US Treasury and EUR swap yields hits its highest level since the pandemic, the upcoming release of US CPI data and the ECB meeting carry the potential to reshape this landscape once again. All eyes are on ECB President Lagarde as she navigates the challenge of maintaining ECB independence from the Fed, especially amidst differing inflation dynamics across the Atlantic. The implications for currency exchange rates, interest rates, and monetary policy are captivating areas to watch closely in the coming days.
ECB’s Lagarde signals June rate cut w/2% inflation in sight.
Markets agree and price in 97bps cut for 2024. Source: Bloomberg, HolgerZ
As expected, the ECB lefts rates unchanged.
The European Central Bank approach continues to follow a data-dependent approach in determining rate path. THE STATEMENT • Inflation forecasts by ECB staff have been lowered, especially for 2024, largely due to reduced energy price pressures. Inflation is now expected to average 2.3% in 2024 and to stabilize around 2.0% in the following years; core inflation projections also revised downwards. They nevertheless say that domestic price pressures remain high, partly due to wages. They say that domestic price pressures remain high, partly due to wages. • Growth projections for 2024 have been downgraded to 0.6%, with a gradual recovery anticipated, leading to 1.5% growth in 2025 and 1.6% in 2026. • The ECB believes current interest rates, if maintained, will significantly contribute to reducing inflation and has committed to keeping rates at restrictive levels as needed. MARKET REACTION • EUR/USD is weaker on the news (to 1.0875) and EUR rates extend their move lower (they were already down every day this week, and prior to the ECB announcement). German 10y is down -7bp to 2.25% at the time we write • Rate cuts expectations are slightly increased for this year, but not massively so far (still four 25bp rate cuts by the end of the year when rounding the probabilities) OUR TAKE • Overall, this is a rather dovish statement for now - let see if Lagarde press conference will reinforces the dovish reading or if she counterbalances the message from the downward revisions on growth in inflation. Source: chart: Bloomberg
The European Central Bank held interest rates steady for the second meeting in a row, as it revised its growth forecasts lower and announced plans to shrink its balance sheet
ECB's Lagarde: We did not discuss rate cuts at all BUT markets price in 5.3 cuts for 2024. “The Governing Council’s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary,” it said in a statement. Source: Bloomberg, CNBC
ECB QT continues. ECB balance sheet back <€7tn, shrank by €5.3bn to €6,996bn, lowest since Jan2021
Total assets now equal to 50% of Eurozone GDP vs Fed's 28% & BoJ's 128%. And Lagarde has warned that the timeline for ending PEPP reinvestments and so QT could be accelerated. Source: HolgerZ, Bloomberg
Will Lagarde / ECB cut rates sooner than anticipated ?
Source: AndreasSteno
