Syz the moment

Germany's blue-chip index Dax jumped >19,000 points for the first time after Fed's jumbo rate cut. Source: HolgerZ, Bloomberg

Says inflation will drop to 2% in course of 2025. Our take: 👉 As widely expected, the ECB just cut its key rates for the second time this year after a first move in June. The Deposit Facility Rate (the rate at which commercial banks’ deposits at the ECB are remunerated) was lowered by 25bp to 3.50%. The main Refinancing rate (the rate applied to short-term liquidity lent by the ECB to commercial banks) was lowered to 3.65%. 👉After those rate cuts, monetary policy remains restrictive, as short-term interest rates are still significantly above the inflation rate of the euro area. However, this is “another step in moderating the degree of monetary policy restriction”, as stated by the ECB. 👉The ECB appears willing to proceed cautiously and gradually in bringing back its monetary policy stance to a neutral level, as domestic inflation remains higher than its target and wages are still rising at an elevated pace. The encouraging trend toward slowing wage growth witnessed recently has apparently not fully relaxed ECB’s concerns on the risk of persistent underlying inflationary pressures. 📈 ECB macroeconomic projections ECB staff’s projections have been revised slightly lower for GDP growth this year and in the following two. As reflected by the most recent economic data, growth will be soft this year, but it is expected to gradually accelerate in the next two years. Inflation is still expected to slow down toward the 2% target by 2026, with already a significant deceleration due next year. “Core inflation” projections have been marginally revised up for this year and the next on the back of firmer-than-expected price pressures in the service sector. 🚨 Conclusions • Since the rate cut was widely anticipated, today’s main news lies in the outlook for ECB rates. • A rate cut in December already appeared highly likely before today’s meeting and it remains so today, in the continuation of the quarterly pace initiated in June. • There was uncertainty around a potential additional rate cut at the October meeting, with future markets previously assigning a 34% chance on another rate cut at the ECB next meeting in October. • As inflation projections have not been revised lower today (even marginally higher for “core” inflation), and GDP growth expectations have only been marginally lower, the case for a step up in the pace of rate cuts appears less pressing now. The probability of an October rate cut dropped immediately after the announcement, to only 17%. Adrien Pichoud Source chart: Bloomberg

This boost in investment (which equals 5% of GDP), would be more than double the size of the Marshall Plan. In other words, Europe is about to unleash a historic orgy of debt and spending... It would most likely raises taxes (and inflation?) This announcement hits its wall of opposition in Germany, irrespective of warning that it’s the only way to make EU more competitive w/China & US. “That can be summarized briefly: Germany should pay for others. That can’t be a master plan,” FinMin Lindner said. Source: Bloomberg, HolgerZ

From Robeco thru Mike Zaccardi, CFA, CMT, MBA.

The European Union requires radical reforms through a new industrial strategy to ensure its competitiveness, to boost social equality and to meet climate targets, according to a keenly awaited report from economist and politician Mario Draghi. The proposals laid out in the report would require between 750 billion and 800 billion euros in additional investment each year, the European Commission estimates. Other areas of concern include supply chain security and defense spending, the report states. BOTTOM-LINE: This could mean more debt, more money printing, more inflation, higher nominal growth. Source: CNBC

Meanwhile, the market see quarterly ECB rate cuts - see chart below. - European Central Bank (ECB) Governing Council member Gediminas Simkus told Econostream Media that he saw a “clear case” for an interest rate cut in September but regarded the potential for another one in October was “quite unlikely.” - Executive Board member Piero Cipollone told France’s Le Monde newspaper that recent economic data so far had confirmed that inflation was slowing, giving scope for the ECB to lower borrowing costs. “There is a real risk that our stance could become too restrictive and harm the economy”. - However, Bundesbank’s Joachim Nagel continued to warn about premature easing, given elevated wage growth and services inflation, in an interview with the Faz newspaper. Source: Bloomberg, T Rowe

Since 1980, the US econ has expanded tenfold, while Germany's has only grown fivefold. This disparity is partly due to faster population growth in the US. However, the underperformance since the 1990s is no accident. The US has capitalized on digitalization far more effectively, driving economic gains, whereas Germany has been slower to embrace technological transformation. A clear example of this is Volkswagen, which highlights Germany's cautious approach to modernization. Source: HolgerZ, Bloomberg

Interesting to see how the year of the Euro introduction coincides with Italian industrial production trend. Meanwhile, German deindustrialization has just brought its industrial production to 2006 level... Source: Chart @DanielKral1, Michel A.Arouet