Market Pulse: Rates for the chop at the ECB?

 The focus this week: ECB on the chopping board

The European Central Bank (ECB) was criticised for being late to the party two years ago when the world’s major central banks began raising interest rates to combat the fiercest inflation surge in a generation. But it looks like it won’t be late when it comes to cutting them. The ECB is expected to bring the bloc’s key rate down to 3.75% when it meets on Thursday, down from its all-time high of 4%. The move would echo similar decisions made by smaller banks in the Czech Republic, Hungary, Sweden, and Switzerland, but would be a first among the world’s biggest economies. 

These cuts make some sense: the eurozone got the sharp end of the stick in the energy crisis sparked by Russia’s invasion of Ukraine. This shock pushed the region’s economy aggressively lower, eventually dragging inflation down with it as consumer demand dried up. Europe is recovering now, but not vigorously. And the region’s sluggish growth suggests the eurozone could benefit from the economic stimulus that lower rates would bring.

What happens next is far from certain, and the ECB won’t want to take its eye off the ball. After all, inflation is already proving bumpier than expected. Data released on Friday showed that headline and core inflation (which excludes volatile food and energy prices) both accelerated more than expected in May. And there could be even more inflationary forces ahead – a strengthening economy, for one, and a lower exchange rate, for another. See, with Europe cutting its rates and the US Federal Reserve standing still, that’s likely to weaken the euro and strengthen the greenback, making imports pricier across the bloc. So the ECB is likely to take a go-slow approach, watching the economy of its 27 member states, while also keeping an eye on what’s happening in the US. 

In the calendar 

Sunday: OPEC meeting, China manufacturing PMI (May)

Monday: Manufacturing PMI for the US, UK, and eurozone (May).

Tuesday: China services PMI (May). Earnings: CrowdStrike, Hewlett-Packard.

Wednesday: US services PMI (May), PMI composite data for the UK and eurozone (May), Canada interest rate decision. Earnings: GameStop.

Thursday: ECB interest rate decision. Earnings: Nio, DocuSign.

Friday: US jobs report (May).

What you might’ve missed last week

US

• Weak demand for new US Treasury bonds drove rates (and worries) higher 
• House prices rose at their fastest pace in 19 months

Asia

• S&P Global Ratings boosted its outlook on India

Global

• Ether saw sharp gains, fuelled by the anticipated launch of its spot ETFs

UK

• BHP’s attempted takeover of Anglo American was knocked back while Royal Mail agreed to be taken private in a $4.5 billion deal
• Business optimism hit its highest in eight years 
• Signs of a housing market recovery helped the pound to its best monthly performance versus the US dollar this year

Why it matters

Lukewarm demand for new Treasury bonds raised alarms about the increasing supply of US government bonds. Investors are worried that the cost of funding the country’s expanding deficit will push yields higher – and keep them there longer. And that would have wide-reaching implications: elevated interest rates increase borrowing costs for companies, dampen consumer spending, and increase the appeal of cash.

Sky-high mortgage rates and house prices to match haven’t been enough to hold US home prices down. The S&P Case-Shiller index, which tracks markets in 20 major US cities, showed a 7.4% increase in prices in March – the fastest yearly increase since October 2022 – as the shortage of homes on the market drew bidding wars.

S&P Global Ratings upgraded its outlook for India to positive from stable, setting the stage for an important move higher in India’s credit rating. Right now, India’s on the very bottom tier of what’s considered “investment grade”: a label that signals that the risk of default is low. A step higher would make the country’s government bonds even more attractive to global investors and lower its borrowing costs.

Ether continued to be the buzz of the crypto market in the week after US regulators approved applications for eight spot ether ETFs. Clearing the first of two paperwork hurdles initially sent ether prices soaring and underscored a further shift toward mainstream acceptance of cryptocurrencies.

Recent deals and mooted deals highlighted the opportunity in British stocks, with lower valuations in the UK market presenting attractive opportunities for global bidders. For instance, the FTSE 100 index trades at 45% discount compared to US stock markets based on forward price-to-earnings ratios. A weaker pound versus currencies like the dollar has also encouraged international bidders, whose cash would go further in the UK. But with the British pound having its strongest month versus the dollar this year, cross-border acquisitions may be tempered.
Disclaimer

This publication has been produced with Finimize. As with all investing, your capital is at risk. Forecasts are never a perfect predictor of future performance, and are intended as an aid to decision-making, not as a guarantee. Past performance is not a reliable indicator of future performance.This publication does not contain and should not be taken as containing, investment advice, personal recommendation, or an offer of or solicitation to buy or sell any financial instruments. Prospective investors should seek independent financial, tax, legal and other advice before making an investment decision. 

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