ECB Seen Cutting Interest Rates Once A Quarter Starting In June

Economic

Central Bank

Summary:

Economists predict deposit rate will hit 2.25% at end of 2025.Geopolitics, US elections and inflation are biggest risks.

The European Central Bank will embark in June on a steady-yet-gradual path of interest-rate cuts that’ll run at least through the end of next year, according to economists surveyed by Bloomberg.

Respondents anticipate a first quarter-point reduction in the deposit rate — currently at a record 4% — at the policy meeting following the Governing Council’s upcoming session on April 11. Similar moves will ensue once a quarter, taking the rate to 2.25% by late 2025.

ECB Seen Cutting Interest Rates Once A Quarter Starting In June_1

Officials seem to have all but agreed that June is the month to start dialing back policy restriction. The subsequent pace of easing is less clear, with President Christine Lagarde insisting it’ll be strictly guided by economic performance — and others already busy plotting their preferred course.

“Since the beginning of rate cuts in the near future seems to be almost decided, attention will now shift to what determines the speed of monetary easing,” said Kristian Toedtmann, a Dekabank economist. “Council members do not seem to have a common understanding of data dependence.”

Greece’s Yannis Stournaras argued last month that two rate cuts before the summer and four total this year would be “reasonable” given the outlook. His Austrian colleague Robert Holzmann, long an advocate for not moving at all in 2024, said this week he has no “in-principle objection” to an initial June step — but only if the economy allows.

Some green shoots have emerged recently, hinting at accelerating growth momentum after the 20-nation bloc only narrowly avoided a recession in the second half of last year. Business confidence is improving as well.

ECB Seen Cutting Interest Rates Once A Quarter Starting In June_2

“The challenge for the ECB will be not to sound too hawkish,” said Carsten Brzeski, ING’s head of macro. “Instead, it will have to explain that a rate cut in June will not so much be the result of the ECB wanting to support the economy but rather a sign of ‘they simply can’ somewhat normalize the restrictive monetary-policy stance.”

That’s possible because inflation slowed more quickly than expected in March and consumer expectations of future gains also eased, suggesting the ECB is on track — if not ahead — in its efforts to reach 2% next year.

What Bloomberg Economics Says...

“We predict 25-basis-point cuts in June, September, October and December, leaving the deposit rate at 3% by year end. We think below-target inflation and dwindling domestic cost pressures will prompt a faster speed of easing after a pause in July.”

— David Powell, senior euro-area economist.

Most economists in the survey consider risks to the ECB’s latest projections — on growth and inflation — to be broadly balanced, though about a third see upside ones for the latter in 2025 and 2026.

ECB Seen Cutting Interest Rates Once A Quarter Starting In June_3

“The ECB should be open to rate cuts as early as June of this year but simultaneously signal to financial markets that overly aggressive rate-cut expectations are unwarranted and counter-productive,” said Dennis Shen, senior director at Scope Ratings, highlighting the risk of a premature loosening of financial conditions.

Markets are currently pricing around 90 basis points of easing this year, compared to about 70 basis points for the Federal Reserve. That gap has reignited a debate that’s as old as the ECB itself — whether Europe can chart its own policy course or will ultimately be forced to follow the US.

Only a quarter of respondents say they’re convinced that Fed decisions won’t impact the ECB’s rate path at all, compared to 36% saying they shouldn’t.

What’s true is that one of the single-biggest economic risks to the euro area is originating in the US in the form of presidential elections. Economists are similarly concerned about global geopolitical tensions and inflation pressures.

Source：Bloomberg

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Zi Cheng

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Economic

In March, UK house prices experienced their first decline in six months, as reported by Halifax, surprising economists and indicating a lack of consistency in the property market's recovery.

The average house price dropped by 1 percent month-on-month in March, decreasing to £288,430 from February's peak of £291,338, marking the end of five consecutive months of increases.

Halifax's data also revealed that March prices were only 0.3 percent higher than a year earlier, a significantly smaller annual rise compared to the 1.45 percent forecasted by economists in a Reuters poll.

Kim Kinnaird, director of Halifax mortgages, noted, "Affordability constraints continue to be a challenge for prospective buyers," adding, "House prices have shown surprising resilience in the face of significantly higher borrowing costs."

These findings are consistent with recent data from Nationwide, which also reported an unexpected decline in house prices for March. However, separate figures released by the Bank of England this week indicated a rise in mortgage approvals to a 17-month high in February.

Despite the monthly downturn, Kinnaird expressed optimism about the market, citing the data as reflecting improvements in the UK's cost of living crisis.

"The broader picture is that house prices are up year on year, reflecting the opposing forces of an easing cost of living squeeze — now that pay growth is outpacing general inflation — and relatively high interest rates," Kinnaird remarked.

Source: Halifax

According to some analysts, the decline in house prices reported by the Nationwide and Halifax indices reflects the increase in mortgage rates during March, contrasting with the six-month low in "effective" interest rates revealed by recent Bank of England data for February.

Andrew Wishart, a senior economist at research firm Capital Economics, suggested, "I think what we are observing in the house price data released this week is that mortgage rates rose in March, likely returning to 5 percent from 4.5 percent in February, and these elevated rates are exerting downward pressure on prices."

Economists noted that the future trajectory of house prices would hinge on changes in interest rates, which currently stand at a 16-year peak of 5.25 percent and play a significant role in how lenders determine mortgage rates.

Source: Halifax

Jonathan Haskel, a member of the Bank of England's policymaking committee, conveyed to the Financial Times last month that he believed reductions in borrowing costs were "a distant prospect" due to underlying inflationary pressures.

"Mortgage rates are anticipated to decrease gradually from current levels, as markets foresee the Bank of England gradually relaxing its policy constraints," stated Rob Wood, chief UK economist at consultancy Pantheon Macroeconomics. "Consequently, affordability is likely to be stretched, potentially restraining increases in house prices."

However, indications suggest that relief for homebuyers may arrive sooner. A recent Bank of England survey of UK businesses indicated that expectations for wage growth reached a two-year low in March, reinforcing the notion that the central bank could commence rate cuts starting this summer.

Wishart remarked that if the Bank of England's benchmark rate decreased more rapidly towards the end of 2024, "we could witness mortgage rates dropping below 4 percent, leading to a near-term plateauing in house prices."

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Alex

Economic

Days after President Joe Biden joined his election rival Donald Trump in voicing concern about a Japanese purchase of U.S. Steel, the manufacturer began touting the benefits of the deal on billboards near its factories from Alabama to Pennsylvania.

The billboards may be the most public signs of what some Japanese officials say in private - that despite high hurdles, Nippon Steel could still steer through the fraught $15 billion acquisition of the iconic American manufacturer.

The deal may well hinge on whether regulators avoid election-year politics by clearing the acquisition after Nov. 5, and, critically, on whether Nippon Steel can win over the influential United Steelworkers (USW) labour union.

Opposition from the Pittsburgh-based union has far-reaching implications in an election year where Pennsylvania is seen as a key battleground state.

The deal is effectively "on life support" after Biden's statement last month that U.S. Steel must remain domestically owned and operated, said David Boling, a former U.S. trade official in Japan who now works for consulting firm Eurasia Group.

Investors seem to agree. Biden's comment, which followed Trump's pledge to block the deal if he wins the Nov. 5 election, sent shares in both companies tumbling. U.S. Steel shares last traded at $41.10, well below the $55 per share price Nippon Steel has offered.

Nevertheless, it is still premature to declare the deal dead, four senior Japanese officials speaking on condition of anonymity told Reuters - a view shared by some analysts, consultants and lawyers. The White House declined to comment on whether Biden's statement meant the purchase could not proceed.

Ongoing regulatory reviews in the U.S. may serve to buy time, thereby delaying a final decision until after the election when the campaign rhetoric has dissipated, the officials and others said.

Furthermore, Nippon Steel could still take steps to ringfence its U.S. operations to ease concerns about foreign ownership.

And finally, the officials and others say, Nippon Steel could make its way through thorny talks and yet win over the steelworkers.

Publicly, Tokyo has sought to distance itself from the deal, saying it is a commercial matter - an approach widely seen as an attempt to play down any controversy ahead of a summit between between Japanese premier Fumio Kishida and Biden in Washington on April 10.

High Hurdles

U.S. Steel's shareholders are due to vote on the acquisition on April 12, but with the firm's board having unanimously recommended shareholders approve, analysts expect it to pass.

The next real hurdle is regulatory. The Committee on Foreign Investment in the United States (CFIUS), a government panel that vets deals on national security grounds, is reviewing the transaction. Nippon Steel said the deal is also being examined by antitrust authorities in several countries including the U.S.

An influential U.S. Senator on Tuesday urged the White House to probe Nippon Steel's exposure to its strategic rival China, a connection the firm has said is "very limited".

While by law CFIUS should complete deliberations within 90 days, in practice it can take much longer via an increasingly common process where parties withdraw and refile their applications, its latest annual report shows.

"There is unlikely to be a decision until after the election," said Bill Reinsch, a former U.S. commerce official now advising the Center for Strategic and International Studies. Biden's comments "have not torpedoed the proposed acquisition," he added.

Two of the Japanese officials said the timing of the deal ahead of the election has stifled debate about its economic merits and that a delay could help calmer heads prevail.

But taking Biden at his word, getting around foreign ownership concerns won't be easy.

Nippon Steel has been at pains to stress its "deep roots" in the United States. It has had a presence there since the 1980s and has 4,000 employees in the country.

Nick Wall, a corporate M&A partner with Allen & Overy in Tokyo, said U.S. regulators may grant conditional approval to the deal if the firm makes changes to the management structure or ensures senior personnel are U.S. nationals.

"There could be structures put in place to ensure it’s owned and controlled by U.S. people, even if the economic control lies in Japan," said Wall, who is not involved in the deal.

The sensitive defence sector provides one such example.

The American subsidiary of British defence contractor BAE Systems does business with the U.S. government under a special agreement where the influence and control of its foreign parent is restricted.

A Biden adviser said the policy question was "settled" by the president and that if the deal is to include foreign partners it would need a "different approach", declining to elaborate.

That puts the focus on the USW, which blasted the deal and both companies for not consulting it before the deal was announced. In a letter to its members on Tuesday, USW leadership called Nippon Steel's latest pledges to support workers a "collection of empty promises".

But a source close to Nippon Steel, who declined to be named due to the sensitivity of the negotiations, said the union could be using the political situation to get better terms and appears to remain engaged in talks.

"There will be no problem to clear U.S. Steel shareholders meeting, anti-trust examination, and CFIUS examination, if they are handled normally," said Shinichiro Ozaki, senior analyst at Daiwa Securities.

"But the most important thing, both before and after Biden's statement, remains whether or not Nippon Steel can reach an agreement with USW."

Source: Reuters

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On Friday, global stock markets experienced declines amid concerns about escalating tensions in the Middle East, leading to a surge in oil prices and raising worries that persistent inflation might postpone central banks' interest rate cuts.

In early trading, the Stoxx Europe 600, spanning the region, fell by 1.1 percent, mirroring a late downturn on Wall Street the previous day. The energy sector was the sole gainer as oil prices surpassed $91 per barrel.

Ahead of the New York trading session on Friday, Wall Street futures remained steady, retracting earlier gains following a substantial surpassing of economists' expectations in US jobs growth and an unexpected drop in the unemployment rate for March.

France's Cac 40 and Germany's Dax both declined by 1.4 percent, while London's FTSE 100, which leans heavily on energy stocks, experienced a comparatively modest drop of 0.9 percent.

These market movements occurred as traders assessed the potential escalation of conflict in the Middle East and potential retaliation from Iran following a suspected Israeli attack on its consulate in Damascus.

Analysts suggested that the surge in energy prices raised the prospect of slower interest rate cuts by the Federal Reserve and the European Central Bank this year.

"Surging oil is reviving stagflation fears," remarked Emmanuel Cau, head of European equity strategy at Barclays.

Asian stocks also slipped, with Japan's Topix falling by 1.1 percent, South Korea's Kospi dropping by 1 percent, and Hong Kong's Hang Seng declining by 0.4 percent.

Oil prices had been climbing in recent weeks as global demand forecasts began to exceed supply growth, alongside stronger-than-expected economic recoveries in the US, Europe, and China.

Brent crude, the international benchmark, reached as high as $91.26 on Friday, its highest level since October last year.

Bob Ryan, a commodity and energy strategist at BCA Research, suggested that prices hitting $100 a barrel this year "wouldn't be a surprise," as the Opec+ cartel appears poised to uphold voluntary production cuts that have successfully reduced inventories.

Outside of Opec+, supply growth has also been weaker than previously anticipated, leading the International Energy Agency to predict in March that the oil market would experience a "slight deficit" this year, contrary to earlier forecasts of a surplus.

Francisco Blanch, head of global commodities at Bank of America, commented, "These levels are manageable." However, he cautioned that exceeding $100 could pose significant challenges for the Federal Reserve.

Traders awaited the latest non-farm payrolls and unemployment data from the US, due later on Friday, for further insights into the outlook for interest rates in the world's largest economy.

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US payrolls rose in March by the most in nearly a year and the unemployment rate dropped, pointing to a strong labor market that’s powering the economy.

Nonfarm payrolls advanced 303,000 last month following a combined 22,000 upward revision to job gains in the prior two months, a Bureau of Labor Statistics report showed Friday. The rise exceeded all expectations in a Bloomberg survey of economists.

The unemployment rate fell to 3.8%, while participation rose.

Job growth in March was led by faster hiring in health care, leisure and hospitality, and construction. A measure of the breadth of job gains increased.

Treasury yields rose and S&P 500 index futures remained higher, while the dollar advanced. Traders trimmed bets on the odds the Fed will lower rates in June.

The labor market has been the stalwart of the US economy, giving Americans the wherewithal to keep spending in the face of high prices and borrowing costs. Friday’s data raise questions as to how much the job market is truly moderating, and how crucial that will be to the Federal Reserve in its fight against inflation.

Officials will see fresh figures on consumer and producer prices next week, followed by the March reading of their preferred inflation gauge — the personal consumption expenditures price index — before their April 30-May 1 meeting.

Fed Chair Jerome Powell said Wednesday that labor supply and demand have come into better balance, nodding in part to more immigration. Policymakers have stressed they’re in no rush to lower borrowing costs and that incoming data will guide that decision.

Two Surveys

The jobs report is composed of two surveys: one of businesses that generates the payrolls and wage data, and another smaller one of households used to produce the unemployment rate.

The household survey also publishes its own measure of employment, which surged nearly a half million in March after declining in the prior three months. Many economists have discounted the recent weakness in this metric given that other indicators remain strong, such as unemployment claims and consumer spending.

Also in that survey is the participation rate — the share of the population that is working or looking for work — which rose to 62.7%, the first advance since November. The rate for workers age 25-54 ticked down to 83.4%, still near the highest in two decades and also flagged by Powell for helping unwind some of the tightness of the labor market.

Increased participation may also be helping alleviate wage pressures. The survey of establishments showed that average hourly earnings rose 0.3% from February and 4.1% from a year ago, the slowest annual pace since mid-2021.

Source: Bloomberg

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Ukadike Micheal

Economic

Stocks

Commodity

Bond yields saw an increase following the release of the latest jobs report, which reinforced speculation that the Federal Reserve may delay interest rate cuts. The Treasury 10-year yields climbed by six basis points to reach 4.37%. Meanwhile, S&P 500 contracts faced challenges in maintaining gains, while the dollar showed signs of advancement.

The US job market exhibited robust growth in March, with nonfarm payrolls surging by 303,000 and the unemployment rate dropping to 3.8%. This data signals a strong labor market supporting the economy, with job gains revised upwards for the previous two months, according to the Bureau of Labor Statistics.

In corporate news, Tesla Inc. announced significant price cuts on its Model Y SUVs to reduce its inventory. This move includes markdowns of up to $5,000 on certain models. Johnson & Johnson also made headlines by agreeing to acquire Shockwave Medical Inc. for approximately $13.1 billion, aimed at expanding its medical device offerings for heart disease treatment. Additionally, Apple Inc. laid off over 600 employees in California as part of its decision to discontinue projects related to car and smartwatch displays.

Regarding market movements, S&P 500 futures rose by 0.3%, Nasdaq 100 futures by 0.4%, and Dow Jones Industrial Average futures by 0.2%. However, the Stoxx Europe 600 experienced a 1.1% decline, while the MSCI World index fell by 0.4%. In currency markets, the Bloomberg Dollar Spot Index saw a 0.2% increase, while the euro, British pound, and Japanese yen displayed varied movements against the dollar.

In the realm of cryptocurrencies, Bitcoin and Ether saw declines, with Bitcoin falling by 2.6% to $66,163.45 and Ether dropping by 3% to $3,226.37. Bond yields continued their upward trajectory, with the yield on 10-year Treasuries rising by six basis points to 4.37%. Similarly, Germany's and Britain's 10-year yields saw increases of three and six basis points, respectively.

Commodity markets remained relatively stable, with West Texas Intermediate crude and spot gold showing little change. These developments in various markets reflect ongoing dynamics influenced by economic data releases, corporate actions, and global events.

The latest jobs report and corporate announcements have driven movements across financial markets. Bond yields rose amidst expectations of Fed policy changes, while stock futures showed mixed reactions. These fluctuations underscore the significance of economic indicators and corporate decisions in shaping market sentiment and investor behavior.

Source: Bloomberg

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Ukadike Micheal

Forex

Economic

In March, the Canadian labor market experienced little change in employment, with a slight decrease of 2,200 jobs. The employment rate also dipped by 0.1 percentage points to 61.4%. Conversely, the unemployment rate saw a 0.3 percentage point increase, reaching 6.1%. Year-over-year, the unemployment rate was up by 1.0 percentage points. March Employment Figures: Stagnation in Jobs, Rise in Unemployment_1

March Employment Figures: Stagnation in Jobs, Rise in Unemployment_1

Youth aged 15 to 24 saw a decline in employment by 28,000, while core-aged men (25 to 54) experienced a rise of 20,000 jobs. Employment remained relatively stable among core-aged women and individuals aged 55 and older.

Several industries faced fluctuations in March, with declines in accommodation and food services, wholesale and retail trade, and professional, scientific, and technical services. However, health care and social assistance saw an increase of 40,000 jobs.

On a regional level, Quebec, Saskatchewan, and Manitoba saw decreases in employment, while Ontario saw an increase of 26,000 jobs. Total hours worked remained steady in March but showed a 0.7% increase compared to the previous year.

Average hourly wages among employees rose by 5.1% on a year-over-year basis, reaching $34.81. This growth in wages followed a 5.0% increase in February.

From March 2023 to March 2024, the employment rate declined by 0.9 percentage points, with employment growth unable to keep pace with the increase in the population aged 15 and older. The public sector saw greater employment growth compared to the private sector during this period.

Self-employment fell by 29,000 in March, offsetting a previous increase in February. The employment rate among youth aged 15 to 24 dropped to 55.0%, the lowest level since February 2012.

The unemployment rate rose to 6.1% in March, with an increase in the number of individuals searching for work or on temporary layoff. The labour force participation rate remained unchanged at 65.3%.

In terms of industries, employment declined in accommodation and food services, wholesale and retail trade, and professional, scientific, and technical services, while it increased in health care and social assistance.

Looking at the market impact of these labor market trends, the fluctuations in employment across various industries can influence consumer spending patterns, investor sentiment, and overall economic growth. Industries experiencing job losses may face reduced consumer demand, impacting their revenue and profitability. Conversely, sectors with employment gains may see increased economic activity and investment.

The rise in average hourly wages suggests potential inflationary pressures, as higher wages can lead to increased production costs for businesses. This could affect pricing strategies and ultimately consumer purchasing power. Additionally, changes in the unemployment rate and labor force participation rate can indicate shifts in the overall health of the economy, affecting investor confidence and market performance.

As the labor market continues to evolve, policymakers, businesses, and investors will closely monitor these trends to make informed decisions regarding economic policies, business strategies, and investment opportunities. The interplay between employment dynamics and market conditions underscores the interconnected nature of the economy, highlighting the importance of a comprehensive understanding of labor market data for effective decision-making.

In conclusion, the recent labor market trends in Canada reflect a complex interplay of factors that can have far-reaching implications for the economy and financial markets. Understanding these dynamics and their potential impact is crucial for stakeholders seeking to navigate the evolving economic landscape and capitalize on emerging opportunities.