Friday Jun 7 2024 13:50
4 min
The European Central Bank cut rates, as expected, and was rather vague about the next steps — also as expected.
The seemingly interesting bit was the ECB chose to raise rates despite not only the uptick in the recent Eurozone inflation data, but also with staff forecasts showing higher inflation. Inflation forecasts raised to 2.5% from 2.3% this year, 2.2% from 2.0% in 2025. We are moving from the point of tacit acceptance of higher inflation to explicit. It’s also true that the rate of inflation has come down a lot – 2.5% or 2.3% is marginal stuff compared to 10% like we saw before.
And wages are not rising as fast as feared: they maybe are a bit elevated but forward-looking indicators signal that wage growth will moderate during the year. The ECB did not give much away in terms of the likely future path of monetary policy, it’s wedded firmly to ‘data-dependence’, but it looks as though we could see another two rate cuts this year. The market thinks maybe just the one. The funny thing is that the ECB doesn’t tend to move before the Fed, and it doesn’t tend to start cutting before a recession. Maybe they are actually ahead of the curve?
It seemed like the kind of hawkish/patient cut the market had been expecting – EUR to USD pushed up to 1.09 and came back off but is rising again this morning. US-German 10-year spreads narrowed further (reconvergence), down below 177bps.
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Which takes us to jobs day in the US. Many economists are worried about the quality of the data. Consensus is for something pretty steady around 180k, average earnings +0.3% and unemployment rate unchanged at 3.9%. If the ECB is likely heading towards 2-3 cuts this year, the case for the Fed to cut in September is building, as I have outlined here all week.
The NFP report will provide the narrative driver on this front into the weekend. EU elections could stoke some volatility in the EURUSD cross.
China trade data for May showed strong export growth and slow import growth - exports rose 7.6% against 6.0% expected, imports up 1.8% versus 4.2% expected. This is the kind of thing that gets certain US politicians animated.
GameStop shares surged 50% after Roaring Kitty posted on YouTube that he would host a live stream later today. Investors are now questioning whether this reflects genuine belief in the stock or is merely a pump-and-dump scheme.
European shares ticked lower in early trade on Friday and are pretty flat for the week.
Wall Street finished flat on Thursday after notching record highs in the prior session: SPX was up 0.02%, Nasdaq fell by 0.1%, and the DJIA rose by 0.2%. Oil prices rallied sharply for a second day and are steady this morning. Gold advanced a bit more with the US 10-year Treasury yield at 4.3% ahead of the payrolls report.
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