ECB Cuts Interest Rates for Eighth Time Amid Trade Tensions, Cooling Inflation

Economic

Forex

Summary:

The European Central Bank slashed interest rates at its latest policy meeting on Thursday as expected, bringing...

The European Central Bank slashed interest rates at its latest policy meeting on Thursday as expected, bringing its key deposit rate down by 25 basis points to 2.0%, although officials did not provide outright guidance for changes later this year.

In a statement, the ECB said its decision to lower borrowing costs for the eighth time since last June comes as the euro area economy faces waning inflation but persistent uncertainty around the impact of global trade tensions.

Thursday’s cut was widely anticipated by markets, meaning that much of the debate among analysts heading into the announcement swirled around the central bank’s plans for rates over the rest of the year. Particularly with inflation easing back down to the ECB’s 2% target, some investors have bet that policymakers will push pause on the rate-reduction cycle in July and potentially roll out one more drawdown before the end of 2025.

"We forecast one more rate cut in the second half of the year with risks skewed towards deeper cuts," said Jack Allen-Reynolds, Deputy Chief Euro Zone Economist at Capital Economics, in a note following the decision.

Officials did not provide any specific rate guidance in their statement, but ratcheted down their expectations for future price gains. Estimates for headline inflation in 2025 and 2026 were lowered to 2.0% and 1.6%, respectively, a drop of 0.3 percentage points compared to the ECB’s projections in March. Inflation is seen returning to 2.0% in 2027.

Speaking at a press conference, ECB President Christine Lagarde added that the ECB is "not pre-committing to a particular rate path".

Consumer price inflation in the 20 countries using the euro eased to 1.9% in May, thanks to sliding energy prices and declining services costs. In the prior month, the figure came in at 2.2%. So-called "core" inflation, which strips out volatile items like food and fuel, decelerated to 2.3% from 2.7%, data from Eurostat, the European Union’s statistics agency, found.

The ECB also left its growth projections for 2025 unchanged, anticipating average gross domestic product expansion of 0.9%. While the first quarter was stronger than expected, the central bank flagged that the euro zone’s prospects for the remainder of the year are "weaker".

Murkiness is also surrounding the impact of U.S. President Donald Trump’s tariff plans. The White House has especially targeted the European Union -- which includes several euro zone countries -- with elevated so-called "reciprocal" levies. The ECB warned that the uncertainty may weigh on business investment and exports in the short term, although medium-term growth is tipped to be bolstered by increased government spending on defense and infrastructure.

"Inflationary pressures in the euro zone are receding faster than expected. Not only did [...] Trump make the European economy great again -- for one quarter, as frontloading of exports and industrial production boosted economic activity -- he also made inflation almost disappear," said Carsten Brzeski, Global Head of Macro at ING, in a note.

Trump referenced the ECB’s rate-cutting campaign earlier this week in a social media post urging Federal Reserve Chair Jerome Powell to bring borrowing costs down at a faster pace. The Fed drew down rates by one percentage point in 2024, but has left them unchanged since December, noting that the tariff turmoil could place renewed upward pressure on inflation in the U.S.

Source: Investing

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Warren Takunda

Economic

China–U.S. Trade War

Unpredictable White House tariff rhetoric and its impact on currency markets, oil prices and the inflation outlook have put central banks across the world in a tight spot.

The European Central Bank cut interest rates on Thursday and looks set to pause, Switzerland appears to be moving back towards negative rates, Japan's resolve to drop ultra-easy monetary policy is wobbling, and baffling U.S. data could keep the Federal Reserve in wait-and-see mode.

Here's a look at where 10 developed-market central banks stand.

Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_1

Change in policy rates by 10 major developed central banks since March

1/ SWITZERLAND

The Swiss National Bank next meets on June 19, and traders see a one in three chance that it will pull rates back into negative territory from 0.25% currently after consumer prices fell for the first time in four years.

The safe-haven Swiss franc has gained 10% against the dollar so far this year on geopolitical and market volatility. That's challenging Switzerland's export-heavy economy and cheapened imports, giving the SNB reasons to be wary about deflation.

Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_2

A line chart comparing inflation metrics over the past five years.

2/ CANADA

The Bank of Canada held rates at 2.75% on Wednesday and said another cut might be necessary if the economy weakened in the face of tariffs.

The BoC has held rates for a second time in a row after an aggressive cutting cycle which shrunk rates by 225 basis points over nine months. Markets price in a roughly 85% chance of another quarter-point cut by September. Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_3

Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_3

A line chart comparing inflation metrics over the past five years.

3/ NEW ZEALAND

Money markets expect the Reserve Bank of New Zealand to hold steady on July 9 after a 25 bps rate cut to 3.25% in May to protect the China-focused economy. The RBNZ also warned that global trade uncertainties made future moves unclear. Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_4

Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_4

A line chart comparing inflation metrics over the past five years.

4/ SWEDEN

Sweden's central bank left its key rate unchanged at 2.25% in May but with on-again-off-again U.S. tariffs now having contributed to an economic contraction in the first quarter, the Riksbank has signaled more easing ahead. Its next rate decision is on June 18. Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_5

Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_5

A line chart comparing inflation metrics over the past five years.

5/ EURO ZONE

The ECB cut rates as expected on Thursday and kept all options on the table, opens new tab for its next meetings even as the case grows for a summer pause in its year-long easing cycle.

That's now below target in the euro zone and it's trying to work out how to handle President Trump's trade war on the EU. That means it may be more cautious going forward.

It has lowered rates eight times in the last year, and markets price in one more rate cut by year-end. Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_6

Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_6

A line chart comparing inflation metrics over the past five years.

6/ UNITED STATES

The Fed, under consistent fire from President Donald Trump for resisting rate cuts, is expected to hold steady at its next June 18 meeting as tariff uncertainty makes wait-and-see its best option for now.

With businesses spooked by Trump's aggressive trade talk, have increased, manufacturing orders have slumped and factory gate prices have surged, indicating stagflation risks that could moderate if the White House softens its stance.

The Fed has held rates in the 4.25%-4.5% range since December, following 100 bps of cuts last year. Money markets price roughly 50 bps of further easing by year-end. Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_7

Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_7

A line chart comparing inflation metrics over the past five years.

7/ BRITAIN

The Bank of England, which has lowered borrowing costs slowly to accommodate bumpy inflation trends, cut rates by 25 bps to 4.25% last month and revealed an unexpected three-way split among its policymakers that signaled uncertainty ahead.

Governor Andrew Bailey says the BoE was staying cautious amid unpredictable global trends. Traders expect no move in June and a 60% chance of a cut by August. Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_8

Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_8

A line chart comparing inflation metrics over the past five years.

8/ AUSTRALIA

Weak growth data and fears of Aussie commodities producers and miners taking big blows from a U.S.-China trade war means the Reserve Bank of Australia stands ready to ride to the rescue with rapid rate cuts.

The RBA cut rates by 25 bps to 3.85% in May and traders see borrowing costs dropping to about 3% by year-end. Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_9

Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_9

A line chart comparing inflation metrics over the past five years.

9/ NORWAY

Norway's central bank has ditched plans to ease monetary policy as its oil-linked currency weakens amid global trade uncertainty, posing a fresh inflationary threat.

The Norges Bank kept rates on hold at a 17-year high of 4.50% in May, and markets anticipate no change at the June 19 meeting. Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_10

Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_10

A line chart comparing inflation metrics over the past five years.

10/ JAPAN

The Bank of Japan, long expected to pursue rate hikes, faces a challenging mix of economic trends if tariffs hurt exports but inflation keeps rising.

After the BoJ held borrowing costs steady at 0.5% in May, Governor Kazuo Ueda steadfastly refused to comment on the possible timing of the next increase.

Big Central Banks' Forecasting Lens Gets Fogged by US Tariffs_11

A line chart comparing inflation metrics over the past five years.

Source: Reuters

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Michelle

Economic

Forex

Canada's trade deficit in April widened to an all-time high of a whopping C$7.1 billion ($5.2 billion), data showed on Thursday, as tariffs imposed by President Donald Trump sucked out demand for Canadian goods from the United States.

Its exports to the rest of the world rose, but could not compensate for the drop in exports to the U.S., data from Statistics Canada showed.Exports to the U.S. shrank by 15.7%, a third consecutive monthly decline, Statscan said, adding that exports south of the border have fallen by over 26% since the peak seen in January.Analysts polled by Reuters had expected the trade deficit to widen to C$1.5 billion for April. Statistics Canada also made a big revision to the trade deficit recorded in March to C$2.3 billion from C$506 million.

Canada shipped 76% of its total exports to the U.S. last year and the trade between the two countries exceeded a trillion Canadian dollars for a third consecutive year in 2024.

But a barrage of tariffs from Trump on Canada and its C$90 billion worth of retaliatory tariffs on U.S. imports have started disrupting trade between the two.

Total exports in April plunged by 10.8% to C$60.4 billion, the lowest level seen in almost two years, Statscan said. This was the third consecutive monthly decline and the strongest percentage decrease in five years, it said.While exports to the U.S. led the drop, lower crude oil prices and a stronger Canadian dollar also contributed.

The Canadian dollar was trading up 0.17% to 1.3651 to the U.S. dollar, or 73.25 U.S. cents. Yields on the two-year government bonds were down 0.4 basis points to 2.613%.

Exports to the rest of the world were up 2.9% and in volume terms total exports registered a big decline of 9.1% in April.

The biggest drop in exports came from motor vehicles and parts which lost 17.4% of trade in April from March and was almost entirely attributable to exports of passenger cars and light trucks, which fell 22.9% in April, Statscan said.

Imports were down 3.5% in April to C$67.58 billion, but were partly offset by imports of unwrought gold.

Due to the sharp decline in exports to the U.S., Canada's merchandise trade surplus with the United States narrowed to C$3.6 billion, the smallest surplus since December 2020, the statistics agency said.

The deficit with rest of the world marginally increased to C$10.7 billion in April from C$9 billion in March.

Source: Kitco

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Adam

Stocks

China–U.S. Trade War

After months of Wall Street gyrations to the twists and turns of U.S. trade policy, signs suggest stock investors are becoming more resilient to developments and cautiously defaulting to optimism that they have weathered the worst of the tariff-related shocks.

U.S. equities have edged higher over the past two weeks as they digest a sharp rally that has brought the benchmark S&P 500 within 3% of its February record high, fueled in part by easing fears about the economic fallout from tariffs.

A case in point: stocks ended Monday's session higher even as markets had grappled with President Donald Trump's announcement of doubling steel tariffs to 50%.

Trump's stunning "Liberation Day" tariff announcement on April 2 sent stocks plunging and set off some of the most extreme market swings since the onset of the COVID-19 pandemic five years ago.

Since then, volatility measures have moderated considerably, and, with the market's rebound, there are signs that technical damage from the slide has healed. Still, investors are mindful that markets remain susceptible to daily swings stemming from negotiations between the U.S. and trading partners as key deadlines near in coming weeks, with elevated valuations making stocks more vulnerable to disappointments.

"What has allowed this almost full recovery in the stock market hinges on the negotiations that are now under way," said Angelo Kourkafas, senior investment strategist at Edward Jones.

"Markets, consumers and businesses have vested interest that we get clarity sooner than later," Kourkafas said. "So potentially it's going to be a critical summer that is going to test the market's momentum."

After falling to the brink of confirming a bear market on April 8, the S&P 500 has surged back nearly 20% and erased its losses for the year. Near the halfway mark of 2025, the index is now up 1.5%.

While Trump's tariffs remain a risk, the market no longer is perceiving them as "this big outlier event," said Keith Lerner, co-chief investment officer at Truist Advisory Services.

"We went through a period where the only thing that mattered for the markets was tariffs," Lerner said. "And now we are in a period where tariffs still matter, but they are not the only thing that matters."

Truist is among the firms becoming more upbeat on the outlook for equities, with RBC Capital Markets and Barclays this week lifting their year-end targets for the S&P 500.

Deutsche Bank strategists this week boosted their year-end target to 6,550, about 10% above current levels, as they cited a less severe expected tariffs hit to corporate profits.

The strategists noted they expect the rally to be "punctuated by sharp pullbacks on repeated cycles of escalation and de-escalation on trade policy."

Several investors and strategists pointed to a "base case" on Wall Street emerging for Trump's tariffs - 10% broadly, 30% on China along with some specific sectoral levies.

The market "started saying the worst is behind us in terms of this whole tariff discussion," said King Lip, chief strategist at BakerAvenue Wealth Management. "The U.S. and China still have a lot of things to work out, but likely the worst is behind us."

MODERATING VOLATILITY

Volatility measures indicate calming fears about trade. The Cboe Volatility Index, an options-based measure of investor anxiety, reached 52.33 in early April, its highest closing level in five years, but has steadily receded and hovered at 17.6 on Wednesday, around its long-term median.

In another sign, the average daily range of the S&P 500 has fallen to about 75 points, on a 10-session basis, about one-third the size from April during the height of post-Liberation Day volatility.

Meanwhile, the S&P 500 has traded above its 200-day moving average - a closely watched trend-line - for about three weeks. The percentage of S&P 500 stocks trading in some form of an uptrend has jumped from 29.4% at the April 8 low to 60% as of last week, said Adam Turnquist, chief technical strategist for LPL Financial.

"There is a growing list of technical evidence that suggests this recovery is real," Turnquist said in a note this week.

Options data also suggests growing bullishness. Over the last month, on average about 0.84 S&P 500 call options traded daily against every put contract traded, the most this measure of sentiment has favored call contracts in at least the last four years, according to a Reuters analysis of data from options analytics firm Trade Alert.

Calls confer the right to buy stocks at a specific price and future date, while puts grant the right to sell shares.

To be sure, some investors warn the threat of tariff disruptions is not going away anytime soon and are wary of market complacency.

"There is still just so much uncertainty," said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.

Indeed, talk of the acronym "TACO" - Trump Always Chickens Out - has spread on Wall Street as a rationale for why markets should not fear harsh tariffs because many believe they will likely be walked back. But some investors are worried about a backlash from the president.

BCA Research strategists said they were wary of "relying on a TACO backstop."

"Trade tensions may have peaked, but we are unwilling to assume they won't sporadically rise from current levels," BCA said in a note this week.

Stock valuations also continue to swell, with the S&P 500's forward price-to-earnings ratio reaching 21.7, its highest level since late February and well above its long-term average of 15.8, according to LSEG Datastream.

Stocks are at "a more vulnerable level," said Chuck Carlson, chief executive officer at Horizon Investment Services. "The market is probably going to be a little bit more sensitive to what it perceives as negative news."

source :Reuters

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Adam

Bond

Economic

Compared to the high-flying mega-cap tickers, the roller-coaster ride of crypto, or the rags-to-riches drama of meme stocks, the US bond market can seem like a sleepy affair.

As millions of people flooded into the stock market over the past few years thanks to Robinhood (HOOD), COVID stimulus payments, and a booming S&P 500, general stock market literacy and an understanding of the things that move markets — Big Tech, earnings and outlooks, and even why economic data moves markets — seem to have made noticeable progress.

Not, however, for bonds. Throughout it all, the bond market and its yields remain the uneaten vegetables on the plate. A chore. Something that is there for safety, not to bring you wealth. Something to be googled later.

But with the slow drumbeat of bond market worries getting louder, now is the time to brush up.

Clearly, the bond market and its relatively slower cadence can mask its huge importance. And its tremors and signals of trouble in recent weeks serve as an important reminder of why a keystone of the global financial system commands so much attention.

Yields on US bonds have been elevated as investors recoil from shifts in trade policy and the prospects of an ever-widening national debt. Yields move in the opposite direction of prices, so as a sell-off intensifies, yields increase, reflecting heightened concerns that buying government debt carries more risk.

Higher yields have a host of consequences that can be felt throughout the economy, as they set the cost of borrowing. High yields mean high mortgage rates, more expensive business loans, and slower economic activity — hence why they're "bad" for stocks and why bonds matter, whether you own them or not.

Governments, massive borrowers themselves, may also find trouble financing the administration of the state if interest rates get high enough. The fear that greater government borrowing might lead to even higher rates and a default crisis has rattled the bond market.

All of which is now at the center of debates in Washington and on Wall Street right now.

"Bond yields — especially Treasury yields — represent the cost of financing for governments." Kathy Jones, Schwab’s chief fixed income strategist, told Yahoo Finance. "When the yields rise, government spending costs go up and vice versa."

Concerns of spiraling US debt were reinforced Wednesday, as President Trump's signature tax bill is expected to increase deficits by $2.4 trillion over the next decade, according to an analysis by the nonpartisan Congressional Budget Office. Which is why the bond market — and Elon Musk — are blowing a raspberry.

All the while, investors have also been behaving in ways that challenge the status of US Treasurys as a safe-haven asset. Bonds typically form part of an investment strategy that offsets riskier assets, like stocks, with more stable, but modest returns, which is why you own them if you have a target-date fund in your 401(k). Underpinning the reliability of bonds is the reputation of the US government: its institutions, economic stability, and integral role in global trade. Hence the controversy, once again.

With investors keeping their distance from bonds during heightened volatility, it's clear how perceptions are shifting.

"The recent volatility in the bond market reflects the combination of policies that are working at cross purposes," Jones said. "Fiscal policy is expansive at a time when the economy is growing at a relatively healthy rate and inflation is still far above the Fed’s 2% target. Meanwhile, tariffs and anti-immigration policies could mean slower growth and higher inflation, but they are being applied inconsistently. The market is caught between these forces and struggling to find a coherent path."

And until that happens, bonds will continue to be in focus.

Source: finance.yahoo

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Glendon

Economic

Stocks

The Nasdaq compositeended Wednesday up for a third-straight day at 19,460.49. The prevailing trend has the tech-laden index aiming for key chart hurdles, including its record highs.

Indeed, thanks to a resurgence in tech, the composite has now advanced 27.5% from its April 8 close, and as much as 32% from its April 7 intraday low. This puts the IXIC in positive territory for the year, up about 0.8%, and up 12.5% quarter-to-date.

With this, it's now down just 3.54% from its December 16 record closing high, and 3.68% from its December 16 record intraday high.

Of note, tech is the best performing S&P 500 indexsector so far this quarter, up about 15.5%. Chipsare doing even better with a 17.9% QTD rise. The NYSE FANG+ index, which provides exposure to 10 of today's highly traded tech giants, (including six of the Mag 7 stocks), has surged 22.3% QTD.

In fact, this week, NYFANG has completely erased its February-April collapse, and is hitting fresh record highs.

Meanwhile, the composite is now nearing the resistance line from its record intraday high, which now resides around 19,820, and presents a tough hurdle in itself:

The early 2025 highs were at 20,110.12 and 20,118.61. The December 16 record close was at 20,173.89 and the record intraday high was at 20,204.58.

Significant support resides in the 18,599.69-18,068.90 area. This zone includes the May 23 low at 18,599.69, the 200-day moving average (DMA) and the Fibonacci-based 233-DMA, which now reside in the 18,495-18,365 area. The March 25 high was at 18,281.13, and the May 12 weekly gap requires a fall to 18,096 for a fill (and 18,068.90 daily basis).

On weakness, bulls would look for this zone to provide fertile ground for a resumption of the advance. The rising 50-DMA ended Wednesday around 17,768.

Source: Reuters

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Adam

Stocks

stock index futures were muted on Thursday as investors looked ahead to the monthly jobs report to gauge the impact of President Donald Trump's trade policies on the labor market and the Federal Reserve's interest rate trajectory.

Following Wednesday's weaker-than-expected U.S. private jobs and services sector data, Friday's non-farm payrolls report will come under sharp scrutiny as investors fear that Trump's erratic trade policies will drive a slowdown in economic growth.

"The numbers weren't so bad as to revive fears about a recession ... investors were reluctant to over-interpret one day's data, not least given the big test is coming tomorrow with the U.S. jobs report," Jim Reid, global head of macro and thematic research at Deutsche Bank, said in a note.

"But, the data led investors to price in more rate cuts this year ... and there's growing confidence that we'll see the first rate cut by September."

The data comes ahead of the Fed's policy decision later this month, where policymakers are widely expected to hold interest rates. Traders currently see at least two rate cuts by the end of this year, as per pricing in money markets.

Despite continued calls from Trump to slash interest rates, Fed Chair Jerome Powell has opted to stand pat so far, awaiting further data to help dictate the policy decision as tariff volatility prevails.

On Wednesday, Washington's doubled tariffs on imported steel and aluminum came to effect and it also marked Trump's deadline for trading partners to make their best offers to avoid other punishing import levies from taking effect in early July.

Investors focused on tariff negotiations between Washington and trading partners, with Trump and Chinese leader Xi Jinping expected to speak sometime this week as tensions simmer between the world's two biggest economies.

U.S. equities rallied sharply in May, with investors boosting the S&P 500 index and the tech-heavy Nasdaq to their biggest monthly percentage gain since November 2023, thanks to a softening of Trump's harsh trade stance and upbeat earnings reports.

The S&P 500 remains nearly 3% below record highs touched in February.

Data scheduled for Thursday include initial jobless claims and international trade data at 08:30 a.m. ET.

U.S. central bank officials including Fed Board Governor Adriana Kugler, Fed Kansas City President Jeffrey Schmid and Fed Philadelphia President Patrick Harker are scheduled to speak later in the day.

At 6:58 a.m. ET, Dow E-minis were up 15 points, or 0.04%, S&P 500 E-minis rose 2.25 points, or 0.04%, and Nasdaq 100 E-minis were higher 9.75 points, or 0.04%.

Most megacap and growth stocks were mixed in premarket trading. Tesla fell 1.8%.

Shares of MongoDB jumped 16.4% after the software company gave an upbeat annual forecast and reported quarterly results above estimates.

Chewy fell 2.6% after Jefferies downgraded the online pet products retailer to "hold" from "buy".