ECB Rate-Cut Expectations Start to Unravel Before First Move

Central Bank

Economic

Summary:

Strong wage growth risks slowing return of inflation to 2%. Governing Council to lower rates by quarter-point on Thursday.

While most economists still foresee quarterly reductions following this week’s initial move, some reckon sticky inflation, rapid wage growth and surprisingly robust euro-zone output will constrain monetary loosening.European Central Bank hawks are pushing some analysts and investors to waver in their expectations for interest-rate cuts this year.

Traders, too, have pared easing bets, reinforced by Executive Board member Isabel Schnabel and Bundesbank President Joachim Nagel seeming to take July off the table, as Austria’s Robert Holzmann said two decreases in 2024 may suffice. ECB Rate-Cut Expectations Start to Unravel Before First Move_1

ECB Rate-Cut Expectations Start to Unravel Before First Move_1

Cautious officials fret that lowering borrowing costs at consecutive meetings could prompt markets to take that pace as their baseline. They may also have less confidence than some of their colleagues that ECB policy can truly diverge from the Federal Reserve, which is likely to stay on hold for a while yet.

“We’ve been comparatively hawkish with our expectations since last year of only three 25-basis-point cuts for this year, but the risk for these expectations remains decidedly for fewer rate cuts — not more,” said Dennis Shen, an economist at Scope Ratings. “The ECB will reasonably want to avoid the mistake of cutting too aggressively during this last mile.”

The latest economic reports offer grounds for wariness. A key gauge of euro-zone pay that policymakers had hoped would show inflation had finally been conquered failed to moderate — indicating price pressures, particularly in the services sector, may take longer to ease. Indeed, inflation picked up to 2.6% last month from 2.4% in April — more than expected.

ECB Rate-Cut Expectations Start to Unravel Before First Move_2

At the same time, the 20-nation economy bounced back more resoundingly than anticipated after the mild recession it suffered in the latter half of 2024, with the labor market staying resilient, unemployment recently hitting an all-time low and business surveys even showing signs of life at struggling manufacturers.

No one sees policymakers reneging on June’s cut, which will trim the deposit rate from the record 4% it reached nine months ago. And the overall retreat in consumer-price gains should resume in the coming months.

But having priced three reductions for this year as recently as April, markets have now ruled out July and only put the chances of a September move at 60%.

Danske Bank’s Piet Christiansen and Mariano Valderrama, an economist at Intermoney in Madrid, are among those that don’t envisage a second decrease until as late as December, according to a recent Bloomberg survey.

“We have doubts regarding September,” said Valderrama, citing the jobs market, wages and speedier economic expansion. What’s more, “fiscal policy isn’t going to become much less restrictive this year.”

Others, like Gebhard Stadler at Bayerische Landesbank, predict a pause in the final month of the year, after just two reductions.

“Core inflation will prove to be more stubborn than the ECB has estimated so far given continued, strong wage growth and healthy margin trends,” he said. “In addition, there’s great uncertainty due to the US elections — also with regard to trade policy and the euro-dollar exchange rate.”

The Fed has signaled that US rates may have to stay high for longer to ensure inflation returns to 2% — raising questions over how far ahead the ECB can venture on its own. ECB President Christine Lagarde and her colleagues, while starting sooner, emphasize that they’re in no rush to lower borrowing costs.

Chief Economist Philip Lane has said policy will remain restrictive throughout 2024, pledging to take his cue from the data as they arrive. And despite insisting on a meeting-by-meeting approach, some fellow officials have provided some rather hawkish pointers.

ECB Rate-Cut Expectations Start to Unravel Before First Move_3

For Schnabel, concerns about premature policy easing argue against a second decrease in July, while Nagel said that “if” the ECB delivers in June, it will “have to wait till maybe September” to do so again. Holzmann stressed that just because he’s “ready to support one cut,” he won’t back others if they’re not justified.

“In the past, a first rate cut was always followed by further rate cuts to support growth and/or to response to a crisis.” said Carsten Brzeski, ING’s head of macro. “This time around, however, there’s none of these two. Therefore, there’s a high risk that the ECB could be forced to move from ‘one is none’ to a ‘one-and-done’ stance.”

Source:Bloomberg

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Alex

Economic

Forex

Analysis from Brown Brothers Harriman, the private banking and investment services provider, finds the Labour Party's return to the centre of the UK political space and the potential for improved relations with the EU can help the Pound unlock value.

We reported recently that other major institutions are constructive on the Pound on the assumption a Labour government will help reduce a Brexit overhang.

"A Labour government would be positive for GBP," says Elias Haddad, Senior Markets Strategist at Brown Brothers Harriman (BBH). "The Labour Party under Keir Starmer has moved away from left-leaning economic policies since taking over from Jeremy Corbyn."

Polls point to a consistent and stable 20-point lead for Labour over the Conservatives. Labour could be on course to win a 194-seat majority, the largest majority since 1924, according to a YouGov poll.

"In our view, a Conservative majority government is simply not a realistic scenario," says Haddad. Regarding policy, he notes Labour shadow chancellor Rachel Reeves's recent statement that the party is "a party of growth and of enterprise."

"Moreover, Labour leaders pledged to improve relations with the European Union," he adds. However, an improved political backdrop is just one pillar underpinning the Pound Sterling outlook.

"Beyond the UK political landscape, we are constructive on GBP mostly versus EUR. We estimate long-term fundamental equilibrium for EUR/GBP at around 0.7300, implying a roughly 17% overvaluation relative to the current spot rate," says Haddad.

Pound to Euro Rate Holds 17% Undervaluation, says BBH_1

A EUR/GBP at 0.73 equates with a Pound to Euro exchange rate of 1.34. (Analysts use fair-value estimates as a guide and not necessarily an end-point target.)

Drivers of Pound Sterling undervaluation include "deeply negative EU-UK real long-term interest rate differentials and the relative monetary policy rate outlook suggest EUR/GBP can correct some of this overvaluation." Pound to Euro Rate Holds 17% Undervaluation, says BBH_2

Pound to Euro Rate Holds 17% Undervaluation, says BBH_2

BBH estimates the Bank of England has less scope to cut rates compared to the ECB because UK underlying inflation is higher than in the Eurozone. In April, UK core CPI was 3.9% y/y versus 2.7% in the Eurozone.

The Pound recently rose to fresh 21-month highs against the Euro after May's inflation figures showed April inflation was stronger than had been expected. This prompted markets to erase expectations for a June interest rate hike, which boosted the Pound.

The immediate concern for Pound-Euro is this week's European Central Bank (ECB) decision, where interest rates are to be cut by 25 basis points, confirming a clear divergence in monetary policy settings between the UK and Eurozone that favours GBP upside.

Because markets fully expect an interest rate cut at the ECB on Thursday, the decision itself won't be a market-moving surprise; what will move the market is the guidance pertaining to future rate cuts.

"The highlight is the ECB meeting, with a rate cut well anticipated, so the guidance for future policy moves will be a key driver. We think the euro will weaken, especially given its strong rally in recent weeks," says Dominic Schnider, a strategist with UBS' Chief Investment Office.

However, other analysts are wary the ECB strikes a more 'hawkish' tone regarding the outlook, which can support the Euro. The Eurozone economy is rebounding, and inflation continues to prove sticky, suggesting there is little need to rush into another cut as early as July.

Expect the ECB to confirm that it remains data-dependent and argue that it is prudent to allow some time before cutting rates again.

This would be a status-quo outcome for the Euro and could result in further near-term strength as Eurozone bond yields firm, likely sending Pound-Euro back towards 1.17 again.

Source: Pound Sterling

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Warren Takunda

Economic

Total retail sales increased by 0.7% year-on-year in May, said the British Retail Consortium, a significant drop from the 3.9% growth seen in May 2023 but higher than the three-month average increase of 0.3%.

“Despite a strong bank holiday weekend for retailers, minimal improvement to weather across most of May meant only a modest rebound in retail sales last month,” Dickinson said. “Although non-food sales fell over the course of the month, the long weekend did see increased purchases of DIY and gardening equipment, as well as strong clothing sales. Growth in computing sales reached their highest levels since the pandemic, with many consumers continuing to upgrade tech bought during that period,” says Helen Dickinson, Chief Executive of the British Retail Consortium.

Food sales increased by 3.6% year-on-year over the three months to May, a notable decrease from the 9.6% growth in May 2023. This growth is also below the 12-month average growth of 6.4%. Despite these figures, the food sector still experienced year-on-year growth for the month of May.

In contrast, non-food sales faced a decline, dropping by 2.4% year-on-year over the three months to May. This is a steep decline compared to the 0.7% growth in May 2023 and sharper than the 12-month average decline of 1.7%. In-store non-food sales saw a 2.7% decrease year-on-year over the same period, a sharp contrast to the 2.9% growth seen in May 2023, and worse than the 12-month average decline of 1.1%.

Online non-food sales offered a glimmer of hope, increasing by 1.5% year-on-year in May, reversing an average decline of 3.0% in May 2023. This growth outpaced the three-month and 12-month average declines of 1.8% and 2.6%, respectively. The online penetration rate for non-food items rose to 36.7% in May from 35.9% in May 2023, slightly higher than the 12-month average of 36.1%.

Linda Ellett, UK Head of Consumer, Retail & Leisure at KPMG, highlighted the cautious optimism in the sector. “Whilst May’s figures show barely positive increases in retail sales, with less than one per cent growth year-on-year, the impact of falling CPI—which means volumes are not declining as quickly—may help to soften the blow for hard-working retailers,” she said.

Ellett also noted the positive impact of the early bank holiday and improved weather on high street sales growth, particularly in categories like health, personal care, beauty, and computing.

Retailers are hoping for a continuation of this trend, bolstered by warmer weather and summer holiday demand. “Whilst sales growth was minimal, it could point to some signs of recovery for the sector, and retailers will be eager for that trend to continue as they carefully maintain their pricing, stock, and cost base,” Ellett added.

Looking ahead, retailers are focused on the upcoming General Election, hoping for favourable policies to boost the economy. “With the General Election date fixed, retailers will be keen to hear positive measures to help boost the economy and, in particular, signs that long-awaited changes to the business rates regime are finally on their way,” Ellett noted.

In the food and drink sector, Sarah Bradbury, CEO of IGD, highlighted stable shopper confidence and the positive impact of falling inflation. “Shopper confidence remained relatively stable this month as shoppers continue to be divided in their spending habits,” Bradbury said. She noted that grocery sales bounced back in May following a decline in April, although the rate of growth is slowing as inflation normalises.

Retailers remain optimistic about the future, anticipating that major events and improved economic conditions will help bolster consumer confidence and spending, providing a much-needed boost to the sector.

Source: Poundsterlinglive

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Cohen

Central Bank

Economic

Speaking at an event last week, RBA’s chief economist, Sarah Hunter, said, the latest inflation figures confirmed "that there’s still strength in a number of categories that we’ve seen up until this point that’s still there."

“Clearly there’s still some strength in inflation and that’s a key consideration for the board in their decision making.”

The latest monthly CPI indicator, released on 29 May, revealed that Australia continues to grapple with persistent high inflation.

The consumer price index (CPI) rose 3.6 per cent in the 12 months to April 2024, according to the latest monthly CPI indicator from the Australian Bureau of Statistics (ABS).

The increase in annual inflation in April is up from 3.5 per cent in March, and above the market expectation of 3.4 per cent.

Economists have agreed that the latest monthly CPI data has given the RBA enough reason to postpone rate cuts.

Though Hunter was reluctant to reveal the RBA’s inner thoughts, she did acknowledge that inflation is a significant concern for the central bank.

“In terms of what’s keeping me up at night, I’m obviously very focused on inflation, and those inflation dynamics, also very focused on the international environment and how that’s evolving and how that impacts us here in Australia,” Hunter said.

Elaborating on inflation, she said the board is very focused on the fact that inflation is “clearly” above the target band.

“We’re constantly assessing the data and updating the outlook,” Hunter added. “Everything is always moving, and you’re never 100 per cent sure how things are going to play out.”

Commenting on the latest CPI data in his weekly note on Friday, AMP’s Shane Oliver described the uptick in the monthly indicator as “disappointing and contrary to our expectations for a fall”.

Describing the data as “worrying for the RBA”, Oliver said: “The further uptick in inflation keeps the risk of another RBA rate hike high and reinforces that rates will be high for longer.

“This was reflected in money market expectations that swung back towards pricing in the risk of another rate hike and pushed back expectations for a rate cut till late next year.”

However, Oliver and AMP remain optimistic, noting that inflation is “likely to resume its downtrend”. Given the weakening economy, Oliver said, “We still see the next RBA move as being a cut.

“To borrow from the minutes to its last meeting, it remains appropriate for the RBA to continue to ‘look though short-term variation in inflation’ and ‘to avoid excessive fine-tuning’.

"At this point, we are continuing to see the first cut coming at year end but note that there is a high risk that it will be delayed into 2025,” the chief economist said.

Most economists expect rates to remain higher for longer, including HSBC’s Paul Bloxham, who also sees a rate hike as a possibility.

Source:Super Review

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Kevin Du

Economic

Stocks

Mining company MMG Ltd. proposed a rights offering in Hong Kong to raise HK$9.08 billion ($1.2 billion), while Yankuang Energy Group is eyeing $634 million in a shares placement. Separately, Poly Developments and Holdings Group is considering raising as much as 12 billion yuan ($1.7 billion) via notes that can be turned into equity.

The firms join other Chinese companies seeking to raise cheap funding through equity or equity-linked notes following signs of life in the country's stock market. The additional issuances are a bright spot for bankers, who have seen mergers and acquisitions and initial public offerings dry up.

Yankuang's placement is the largest by a Hong Kong-listed firm since April 2023, when sportswear developer Anta Sports Products Ltd. raised $1.5 billion through a similar offering, according to data compiled by Bloomberg. Boosted by Yankuang, share sales by Hong Kong-listed companies jumped to $1.7 billion this quarter, already the highest in a year.

Chinese companies have also been tapping convertible bonds at a record pace as they give firms the flexibility to raise funds cheaply without immediate stock dilution, at interest rates that are usually lower than on regular debt. Alibaba Group Holding Ltd. and JD.com Inc. raised $7 billion together through the tool last month.

“Chinese companies are trying to ride on the positive momentum to raise money they need as we see enthusiasm over the Chinese market now,” said Kenny Ng, a strategist at China Everbright Securities International. On convertibles, he said the onshore market has an extra benefit as the cost there is even cheaper with lower interest rates.

Poly's offering, if it happens, will be rare in that only three Chinese real estate firms have raised over $1 billion through a convertible over the past twenty years, Bloomberg data show.

Fund-raising efforts may gather pace as signs of cooling momentum in the Chinese stock rebound spur a sense of urgency to firms. Companies need to capitalize on a rally that may well reverse given investors' concerns about the country's policy uncertainties and geopolitical risks.

The CSI 300 Index for mainland shares has slipped after rallying about 16% through mid-May from this year's low. The Hang Seng China Enterprises Index has also failed to extend gains following a near 40% trough-to-peak advance.

Some hedge funds have taken profit following a rally in property developer stocks while others have built short positions, according to JPMorgan Chase & Co.

A Bloomberg Intelligence stock index of developers surged more than 70% over the month through May 17, when Beijing unveiled a housing rescue package that included cutting mortgage rates and down-payments. The gauge fell in the following two weeks as doubts emerged on the potency of the measures.

“If the equity rally of the China property sector continues, which is a big if, we might see more developers tapping the CB market,” said Zerlina Zeng, senior credit analyst at Creditsights Singapore LLC.

Source: Bloomberg

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Cohen

Economic

US factory activity shrank in May at a faster pace as output came close to stagnating and a measure of orders fell by the most in nearly two years.

The Institute for Supply Management’s manufacturing gauge fell 0.5 point to 48.7, the weakest in three months, data out Monday showed. Readings less than 50 indicate contraction. The figure was softer than the 49.5 median estimate in a Bloomberg survey of economists.

The purchasing managers group’s measure of new orders slid 3.7 points, the biggest drop since June 2022, to 45.4 in May. The bookings index now stands at the lowest level in a year, suggesting demand across the economy is weakening. As a result, ISM’s production index slipped to 50.2.

US Factory Activity Contracts as Orders Slide, Output Weakens_1

Seven industries reported contracting activity in May, led by wood products, plastics and rubber, and machinery. Seven sectors reported growth.

“Demand remains elusive as companies demonstrate an unwillingness to invest due to current monetary policy and other conditions,” Timothy Fiore, chair of the ISM Manufacturing Business Survey Committee, said in a statement. “These investments include supplier order commitments, inventory building and capital expenditures.”

The figures indicate US manufacturing is struggling to gain momentum due to high borrowing costs, restrained business investment in equipment and softer consumer spending. At the same time, producers are battling elevated input costs.

“I think we plateaued,” Fiore said on a call with reporters. “Without some kind of movement on the monetary side here, we’re probably sitting where we’re going to sit for quite some time.”

While the ISM’s index of prices paid for materials and other inputs eased to 57 last month, it’s still the second-highest in about two years. Twenty-six percent of companies reported higher prices in May, down from 31% a month earlier.

One hopeful sign for domestic producers was a gauge of export demand grew for the third time in the last four months.

Another was a pickup in factory employment. The group’s measure climbed to 51.1 in May, the highest since August 2022 and suggesting producers are having more success securing labor.

Source:Bloomberg

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Alex

Economic

Stocks

Forex

Indian shares are likely to open higher on Tuesday as counting of votes in the recently concluded elections were set to begin, led by banks and infrastructure stocks, which analysts said would benefit if Prime Minister Narendra Modi returns to power.

The Gift Nifty was trading at 23,575 points as of 7:00 a.m. IST, indicating that the Nifty 50 will open higher than its Monday close of 23,263.90.

The Nifty 50 and S&P BSE Sensex jumped as much as 3.5% on Monday, hitting record highs after exit polls projected the Bharatiya Janata Party-led National Democratic Alliance will likely get a two-thirds majority in the lower house.

The benchmarks logged their best session in nearly 40 months.

The counting of votes will begin at 8:00 a.m. IST.

Public sector enterprises, state-run banks, infrastructure stocks and realty stocks surged between 5%-8% on hopes of policy continuity, analysts said.

The benchmark indexes have grown by a little more than three times in value since Modi became prime minister of the country in May 2014.

India's volatility index eased to a two-week low on Monday after the exit polls, indicating less uncertainty regarding the outcome than feared, analysts said.

They expect the rally to continue for a few more sessions.

The rally is anticipated to sustain in-line with the magnitude of the actual tally, as inflows which were sitting on the sidelines in the last 3 months pour in, said Vinod Nair, Head of Research, Geojit Financial Services.

Banks and Financials, which rose 4%, each to record highs on Monday, will also be major beneficiaries of the higher private capital expenditure, analysts said.

The improvement in corporate balance sheet strength and improved banking system will ensure double-digit returns in Indian equities over the next two-three years, Axis Securities analysts said.

State Bank of India, Bank of Baroda, REC, NTPC were among the top picks of the brokerage.

Foreign investors net bought shares worth 68.51 billion rupees ($824.4 million) on Monday, while domestic institutional investors purchased 19.14 billion rupees in stocks, as per provisional exchange data.