It’s Time for the ECB To Diverge From The Fed, Stournaras Says

Economic

Central Bank

Summary:

Four rate cuts still possible in 2024, even if Fed moves later.Greek central bank chief speaks to Bloomberg in interview.

The European Central Bank shouldn’t be afraid to shift its “overly prudent” stance on interest rates away from that of the Federal Reserve, according to Governing Council member Yannis Stournaras.

Speaking in Frankfurt after the ECB gave the clearest signal yet that it will begin unwinding its unprecedented bout of rate hikes in June, the Greek official reiterated that four cuts are possible this year — despite investors scaling back wagers on such moves globally.

“Now it’s time to diverge,” Stournaras told Bloomberg. “The situations in the euro area and the US are completely different. In the US, demand is much stronger — mostly stemming from a push coming from the budget. We don’t have that in Europe. And inflation in the euro area was mostly supply-side led — not demand-side led, not led by wages.”

The remarks come on the heels of a US inflation release that overshot expectations and triggered a rapid repricing of bets on monetary easing. Markets now reckon the euro zone, where the most recent consumer-price data fell short of estimates, will see three rate cuts in 2024, compared with fewer than two for the Fed. It’s Time for the ECB To Diverge From The Fed, Stournaras Says_1

It’s Time for the ECB To Diverge From The Fed, Stournaras Says_1

Speaking after Thursday’s ECB decision, President Christine Lagarde reaffirmed that she and her colleagues don’t take their cue from across the Atlantic. She did, though, concede that there are “multiple channels through which influence can be exercised” — not just exchange-rate dynamics as talk of parity grows louder.

“We are not Fed-dependent,” Lagarde told reporters. “The United States is a very large market a very sizable economy a major financial center as well so all that finds its way into our projection.”

For Stournaras, the struggles of the region’s 20-nation economy make the case for looser policy more urgent. While he still envisages a so-called soft landing, he cautions that waiting too long to lower rates would imperil already anemic growth and risk inflation dipping below the 2% goal.

“We see the first seeds of a recovery in Europe — also in Germany,” Stournaras said. “We don’t want to kill these first seeds of recovery.”

He’s pushing for back-to-back rate reductions in June and July, followed by another two by year-end — a view that’s not shared by all 26 members of the Governing Council.

Some of his more hawkish colleagues favor a more cautious approach, worried that inflation could bounce back as wages jump. They’d prefer moves every three months — when the ECB updates its quarterly projections.

That debate, currently in its early stages, will play out over the coming weeks. In the meantime, Stournaras wants the ECB — which was accused of moving too slowly as inflation surged — to start acting.

“Last September we hiked as insurance against too high inflation,” he said, expressing confidence that pay growth will continue to moderate. “Now it has turned the other way. There is risk that inflation will fall too far below the 2% target. We now need an insurance in order not to get behind the curve.”

Source：Bloomberg

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Danske Bank

Economic

Central Bank

Stocks

Forex

In focus today

In the euro area, focus today is on final March inflation data for Germany, France, and Italy. The final data will allow us to estimate how much the timing of Easter impacted the March numbers and to what extent we should expect an effect on the April numbers.

From the US, University of Michigan’s preliminary April consumer sentiment survey is due for release in the afternoon. The Fed focuses on the consumers’ inflation expectations, which have so far remained well anchored close to the 2% target even if market-based inflation expectations measures have recently edged higher on the back of rising oil prices.

From China, trade data for March will be released. Export growth has trended higher over the past 3-4 months and PMI export orders have been strong in March. However, monthly export data are quite volatile so we could see a set-back after some strong months in January/February. We may also get credit and money growth for March but no specific date has been published.

From Sweden, we expect today’s inflation print (March) to show that the disinflation process continues steadily, although the early Easter may cause disruptions to price patterns especially when it comes to travel. Food prices constitute a downside risk based on data from peers (Nordics). We forecast CPIF and CPIF excl. Energy at 2.6% y/y and 3.2% y/y, which is 0.1 percentage points below the Riksbank’s new forecasts on both accounts.

Economic and market news

What happened overnight

In the space of geopolitics, the US tried to deescalate Israel-Iran tensions by engaging for China to urge restraint from Iran. Iran has vowed to respond after accusing Israel of an attack on their embassy in Damascus which killed high-ranking military personnel. This risks escalating tensions in the region.

From Asia, Bank of Korea kept monetary policy unchanged (tight) as inflation remains sticky, while the USD/JPY lost slightly but remained above 153 as Japanese Finance Minister Suzuki reiterated his intention to respond if there are excessive moves in the exchange rate.

What happened yesterday

The ECB left policy rates unchanged yesterday as unanimously expected, and as such market impact was muted. While there was no direct confirmation of a June rate cut they reiterated that it will be appropriate to reduce rates if the economy develops as expected. We expect the ECB to deliver three 25bp cuts this year, but risks are skewed towards fewer cuts due to somewhat sticky domestic inflation.

Several headlines out of China indicated that the country is done with fiscal and monetary stimulus, with the NDRC stating at a news conference strong support for investments and consumption. This comes after yesterday’s weaker than expected CPI print.

From the US we got mostly hawkish signals. Initial jobless claims surprised slightly to the downside at 211k (cons: 215k), while the Fed’s Williams, Collins and Barkin all suggested that a near-term rate cut would not be necessary.

In Sweden, Prospera inflation expectations were anchored at the target for all horizons. Riksbank’s Jansson said that as he sees is, the main threat to a rate cut in May will be if other central banks postpone their rate cuts as this could weaken the SEK and through that channel raise inflation.

In Norway, the mainland GDP figure for February printed lower than expected at -0.2% m/m (consensus: -0.1%), although December growth was revised up to 0.6% (prev: 0.4%).

Equities: Global equities were higher yesterday, shrugging off fast Wednesday’s CPI disappointment. Interestingly, this was mostly led by US cyclical growth stocks. Hence, 7 out 10 sectors in MSCI World were lower yesterday, and 14 out 25 industries were lower in the S&P 500 where cyclicals outperformed defensives by almost 2%. This massive rotation yesterday is hard to justify 1:1 from top-down data yesterday, but it underscores how one should be careful in being too negative and defensive when growth is strong even as we have a looming inflation challenge. In US yesterday, Dow -0.01%, S&P 500 +0.7%, Nasdaq +1.7% and Russell 2000 +0.7%. Most Asian markets are lower this morning led by China. Japan is moving more in tandem with the global/US trend and is higher this morning. US and European futures are higher this morning.

FI: Yesterday’s ECB meeting was largely a non-event as judged by the market reaction. European rates traded mostly sideways through the ECB press conference, albeit 10y Bunds ended the day at 2.46%, which was 2bp higher than Wednesday’s close. Italy was the underperformer by widened 4bp to core amid a minor curve steepening.

FX: Yesterday’s session was mostly about digesting the strong US March CPI print. EUR/USD is approaching the 1.07 mark. Intervention jitters are still present in Japan, with USD/JPY above 153. EUR/GBP continues to trade within a very tight range around the 0.8550 mark. EUR/SEK is consolidating around 11.50. EUR/NOK is hovering around 11.60. EUR/DKK briefly rose above 7.46 yesterday and thus continues to trade at a relatively high level.

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Samantha Luan

Economic

Commodity

Gold price (XAU/USD) prolongs the recent well-established uptrend and climbs to the $2,400 neighborhood, or a fresh all-time high during the Asian session on Friday. Investors remain concerned about the risk of a further escalation of geopolitical tensions in the Middle East, which, in turn, is seen as a key factor benefiting the safe-haven precious metal. Apart from this, expectations that major central banks will cut interest rates this year offer additional support to the non-yielding yellow metal and contribute to the positive move.

Bulls, meanwhile, seem rather unaffected by the recent US Dollar (USD) bullish run, bolstered by reduced bets for interest rate cuts by the Federal Reserve (Fed), which tends to undermine demand for the Gold price. Investors pushed back expectations about the timing of the first rate cut to September from June following the release of hot US consumer inflation figures on Wednesday. Market participants also pared their bets for the number of interest rate cuts this year to fewer than two from about three or four a few weeks ago.

That said, extremely overstretched conditions on daily, weekly and monthly charts might hold back traders from placing fresh bullish bets around the Gold price. Nevertheless, the XAU/USD remains on track to register gains for the fourth straight week, also marking the seventh in the previous eight. Moving ahead, the release of the Preliminary Michigan Consumer Sentiment Index, which, along with speeches by influential FOMC members, will drive the USD demand and produce short-term trading opportunities around the precious metal.

Daily Digest Market Movers: Gold price benefits from the worsening Middle East crisis

Heightened tensions in the Middle East, amid a possible Iranian retaliation over a suspected Israeli strike on its embassy in Syria, lift the safe-haven Gold price to a fresh all-time high on Friday.

The cooler-than-expected US Producer Price Index released on Thursday keeps alive hopes for an imminent interest rate cut by the Federal Reserve and provides an additional boost to the XAU/USD.

According to the CME Group's FedWatch tool, traders see a greater chance that the Fed will not start its rate-cutting cycle before the September policy meeting and fewer than two rate cuts this year.

New York Fed President John Williams noted that inflation setbacks are not a surprise and that the central bank does not need to change policy in the near term, though eventually will need to cut rates.

Richmond Fed President Thomas Barkin said that the central bank is not yet where it wants to be on inflation and this week's CPI report did not increase his confidence that disinflation is spreading.

The hawkish outlook keeps the US Treasury bond yields elevated, which allows the US Dollar to stand tall near the YTD top, albeit does little to dent the bullish sentiment surrounding the XAU/USD.

Technical Analysis: Gold price bulls retain control despite overbought conditions

From a technical perspective, the strong positive momentum remains uninterrupted despite the extremely overbought Relative Strength Index (RSI) on the daily chart. Bulls, however, might opt to take some profits near the $2,400 mark heading into the weekend, warranting some caution before positioning for any further appreciating move. Any meaningful corrective slide below the Asian session low, around the $2,370 area, however, is likely to find decent support near the $2,352-2,350 region. Some follow-through selling could expose the next relevant support near the $2,332 area before the Gold price eventually drops to the $2,300 neighborhood, or the weekly low.

Source：FXStreet

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Kevin Du

Economic

Stocks

The Thursday Overview of the DAX Performance

The DAX declined by 0.79% on Thursday. Reversing a 0.11% gain from Wednesday, the DAX ended the session at 17,955.

The ECB Press Conference

On Thursday, the ECB signaled plans to cut interest rates despite fading bets on a June Fed rate cut. However, investor sentiment toward the Fed rate path remained a headwind.

US Economic Calendar: US Producer Prices Signal Sticky Consumer Price Inflation

On Thursday, inflation remained a focal point. US producer price numbers for March signaled a sticky consumer price inflation outlook.

Producer prices increased 2.1% year-on-year after advancing 1.6% in February. Economists forecast a 2.2% increase. Core producer prices rose 2.4% year-on-year after increasing 2.1% in February. Economists expected core producer prices to rise by 2.3%.

The DAX reacted to the numbers and the ECB press conference, sliding to a session low of 17,865.

On Thursday, the Dow slipped by 0.01%. The Nasdaq Composite Index and the S&P 500 saw gains of 1.68% and 0.74%, respectively.

The Thursday Market Movers

Bank stocks reversed gains from Wednesday on ECB plans to cut interest rates. Deutsche Bank and Commerzbank saw losses of 2.47% and 4.02%, respectively.

Auto stocks continued to trend lower. Porsche and Volkswagen declined by 0.81% and 0.81%, respectively. Mercedes Benz Group fell by 0.34%, while BMW bucked the trend, gaining 0.36%.

Deutsche Telekom went ex-dividend, sliding 6.15%.

ECB Forecasts and ECB Commentary in Focus

On Friday, the ECB will be in focus again. The ECB Survey of Professional Forecasters will warrant investor attention. Inflation and growth forecasts could influence buyer appetite for DAX-listed stocks.

Moreover, investors should consider ECB commentary. ECB Executive Board Members Luis de Guindos and Frank Elderson are on the calendar to speak.

US Economic Calendar: Consumer Sentiment and the Fed

On Friday, preliminary Michigan Consumer Sentiment numbers will draw investor interest. Economists forecast the Michigan Consumer Sentiment Index to fall from 79.4 to 79.0 in April. Weaker-than-expected numbers could signal a pullback in consumer spending and raise bets on a June Fed rate cut.

Downward trends in consumer spending dampen demand-driven inflation.

After the inflation reports, investors should also monitor FOMC member speeches. FOMC members Raphael Bostic and Mary Daly are on the calendar to speak. Reactions to the inflation reports and views on the timing of Fed rate cuts warrant investor attention.

Away from the economic calendar, corporate earnings will also influence market risk sentiment. JPMorgan Chase (JPM), Wells Fargo (WFC), BlackRock (BLK), and Citigroup (C) are among the big names to release earnings on Friday.

Near-Term Outlook

Near-term trends for the DAX will likely hinge on ECB chatter and US economic indicators. Weaker-than-expected US consumer confidence numbers could raise bets on June Fed rate cut. However, FOMC members may have more impact. Away from the economic calendar, corporate earnings will move the dial.

In the futures, the DAX and the Nasdaq Mini were up 95 and 3 points, respectively.

DAX Technical Indicators

Daily Chart

DAX Index Today: ECB Policy Shifts, US Indicators, and Corporate Earnings_1

The DAX remained above the 50-day and 200-day EMAs, sending bullish price trends.

A DAX return to the 18,250 handle would support a move toward the April 2 all-time high of 18,567.

ECB surveys, central bank commentary, the US economic calendar, and corporate earnings need consideration.

A drop below the 17,850 handle could give the bears a run at the 50-day EMA.

The 14-day RSI at 47.47 suggests a DAX fall through the 17,615 support level before entering oversold territory.

4-Hourly Chart

DAX Index Today: ECB Policy Shifts, US Indicators, and Corporate Earnings_2

The DAX sat below the 50-day EMA while remaining above the 200-day EMA, sending bearish near-term but bullish longer-term price signals.

A break above the 50-day EMA would give the bulls a run at the 18,350 handle. A DAX return to the 18,350 handle could bring the all-time high into play.

Conversely, a drop below the 17,800 handle could signal a DAX fall toward the 17,615 support level.

The 14-period 4-hour RSI at 36.40 indicates a DAX break below the 17,800 handle before entering oversold territory.

Source: FX Empire

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Samantha Luan

Economic

Stocks

Banks spending more on technology to meet regulatory mandates, companies upgrading SAP systems and a broader increase in technology spending after US elections due in November are some of the factors that have raised demand recovery prospects for India’s $245 billion-plus IT services sector next year, according to BofA Securities, which raised its rating on Infosys Ltd. April 9.

Tata Consultancy Services Ltd., Asia’s biggest IT services exporter, will report its fourth-quarter earnings Friday, followed by smaller rivals Infosys and Wipro Ltd. next week and HCL Technologies Ltd. on April 26. Sales have been slowing at these firms as their clients in the US and Europe have been reluctant to spend on large discretionary projects at a time of economic uncertainty, and the January-March quarter is also likely to have remained soft.

That may change now. With global economies showing signs of normalizing and the optimism over Fed interest rate cuts this year, analysts expect companies across key markets to spend more on technology that will drive higher growth forecasts by the Indian software services firms.

There are already some indicators of companies preparing for this probable demand upturn. Consensus estimates show most large IT companies are heading toward net headcount additions in the first half of 2024, after about a year of net reduction in staff on slower hiring, according to data compiled by Bloomberg. Kumar Rakesh, an analyst at BNP Paribas Securities, wrote in an April 1 note that an increase in job postings in recent months, especially for AI-related roles, is a sign of demand revival in the IT industry.

TCS and Infosys are pioneers in India’s IT services sector, which accounts for 7.5% of the South Asian nation’s more than $3 trillion economy. The companies curbed costs, reduced hiring of engineering graduates and expanded to new technologies such as artificial intelligence to cope with the slowdown. The sector is key to Prime Minister Narendra Modi’s plan to add more jobs and expand skilled workforce as India is vying to replace China as the world’s next growth driver.

In January, Infosys narrowed its sales growth forecast for the fiscal year ending March 2024, while TCS, which doesn’t give guidance, reported that December-quarter revenue grew 1.7% in constant currency terms, well below the double-digit pace of the previous year. Wipro’s sales for the three months to December fell 4.4% from last year and the company guided growth may be negative in the fourth quarter.

Executives from TCS and Infosys told investors after third-quarter earnings that the market had stabilized and clients were spending on AI-driven projects and software services that helped them cut costs.

Upgrading their rating on Infosys, BofA Securities analysts Kunal Tayal and Jatin Kalra forecast higher transformational IT spends in 2025 after the US Presidential election, and bigger regulatory expenditure by banks to align with Basel III regulations. Earnings guidance from the companies next week could provide a “floor” to the outlook in what is again expected to be another soft quarter, they said.

“FY25 estimates have been adequately cut over the last few quarters, leaving little room for further downgrades,” analysts at Mumbai-based brokerage Nuvama wrote in a note April 2.

Still, markets remain wary as a guage of IT sector stocks has given up nearly all of the gains from its rally during the previous earnings season, and a weaker-than-expected forecast from US-listed peer Accenture Plc sullied investor sentiment, putting further pressure on the upcoming earnings season to act as a catalyst.

Source: Bloomberg

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Alex

Economic

Forex

The Japanese Yen (JPY) is seen oscillating in a narrow trading band against its American counterpart during the Asian session on Friday and consolidating this week's heavy losses to the lowest level since 1990. The Bank of Japan (BoJ) has offered few cues on when it will increase interest rates further, while the markets are now betting that the Federal Reserve (Fed) will not cut interest rates, at least before the September policy meeting. This, in turn, suggests that the large difference in rates between the US and Japan will stay for some time, which, along with a stable performance around the equity markets, continues to undermine the safe-haven JPY.

The US Dollar (USD), on the other hand, holds steady near the YTD peak in the wake of expectations that the Fed will keep rates higher for longer on the back of still-sticky inflation. This turns out to be another factor acting as a tailwind for the USD/JPY pair, though bulls seem reluctant to place aggressive bets amid the recent verbal warnings from Japanese officials that they would intervene in the markets to stem any further JPY weakness. Nevertheless, the fundamental backdrop suggests that the path of least resistance for the currency pair is to the upside, and any meaningful corrective decline is more likely to be seen as a buying opportunity.

Daily Digest Market Movers: Japanese Yen struggles to register any meaningful recovery amid the BoJ’s dovish outlook

The Japanese Yen continues to be weighed down by the Bank of Japan's cautious approach and uncertain outlook for future rate hikes, which, along with a bullish US Dollar, lifted the USD/JPY pair to a fresh 34-year peak on Thursday.

The USD climbed to its highest level since November 14 as investors pushed back the expected timing of the first interest rate cut by the Fed to September from June following the release of hot US consumer inflation figures on Wednesday.

Investors also pared their bets for the number of rate cuts of 25 basis points (bps) this year to fewer than two, or roughly 42 bps, from about three or four a few weeks ago in the wake of hawkish comments by several Fed officials.

Richmond Fed President Thomas Barkin said on Thursday that the latest data did not increase his confidence that disinflation is spreading in the economy and that the central bank is not yet where it wants to be on inflation.

Furthermore, New York Fed President John Williams noted that inflation setbacks are not a surprise and that the central bank does not need to change policy in the very near term, though eventually it will need to cut rates.

The yield on the rate-sensitive two-year and the benchmark 10-year US government bonds held steady near a five-month peak after data on Thursday showed that the US Producer Price Index (PPI) rose by a modest 0.2% in March.

The recent jawboning from Japanese authorities, showing readiness to intervene in the markets to address any excessive falls in the domestic currency, and persistent geopolitical tensions lend some support to the safe-haven JPY.

Japan's Finance Minister Shunichi Suzuki reiterated on Friday that he will closely watch FX moves with a high sense of urgency as a weak JPY could push up import prices and have a negative impact on consumers and firms.

The USD/JPY pair remains on track to register strong weekly gains, up for the fifth straight week, as market participants now look to the release of the Preliminary Michigan Consumer Sentiment Index for short-term trading impetus.

Technical Analysis: USD/JPY needs to consolidate before the next leg up, 152.00 resistance-turned-support holds the key for bulls

From a technical perspective, the post-US CPI breakout through a two-week-old trading range resistance near the 152.00 mark favors bullish traders. That said, the Relative Strength Index (RSI) on the daily chart – though it has eased from higher levels – is hovering near overbought territory. This makes it prudent to wait for some near-term consolidation or a modest pullback before positioning for any further appreciating move. In the meantime, the multi-decade high, around the 153.25-153.30 region, now seems to act as an immediate hurdle, above which the USD/JPY pair could aim to reclaim the 154.00 round figure.

On the flip side, any meaningful corrective decline below the overnight swing low, around the 152.75 zone, is more likely to attract fresh buyers and remain limited near the trading range breakout point, now turned support, near the 152.00 mark. The said handle should now act as a strong base for the USD/JPY pair, which, if broken decisively, might prompt some profit-taking and pave the way for a slide towards the 151.40 intermediate support en route to the 151.00 round figure. Some follow-through selling will suggest that spot prices have topped out in the near term and shift the bias in favor of bearish traders.

Source：FXStreet

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Thomas

Economic

Energy

German industry got rich thanks partly to its close energy trading relationship with its political and economic rival Russia. The past few years have shown just how misguided that relationship was, as Russia invaded Ukraine and cut off Germany’s cheap, vital gas supply.

Now, one of Germany’s leading renewable power bosses has suggested it’s a mistake the country could rue forever, as the fallout from the energy crisis is set to permanently damage its industry.

Speaking to the Financial Times, RWE boss Markus Krebber said gas prices in Germany were structurally higher than elsewhere in Europe thanks to the country’s reliance on liquified natural gas imports.

Germany imported 55% of its natural gas supply from Russia when the country invaded Ukraine in February 2022. Russia was also Germany’s primary source of oil and coal imports.

The country has managed to shed most of its reliance on Russian gas. Germany cut its gas imports by 32.6% in 2023, the country’s energy regulator said, mostly as a result of cutting out Russian supply.

However, Germany is still heavily dependent on other countries for its energy supply, creating pricing issues for the embattled economy. The effects on German industry have been pronounced and, according to the RWE chief, are likely to be long-lasting.

“You’re going to see a bit of recovery, but I think we’re going to see a significant structural demand destruction in the energy-intensive industries,” Krebber told the FT.

German industry declines

Since Russia’s invasion of Ukraine, Germany has found itself in the unusual position of becoming the major laggard of Europe’s stuttering economic engine.

The country is on the brink of a technical recession after its economy contracted 0.3% in 2023. The outlook for this year is bleak, with the German government slashing its GDP growth forecast from 1.3% to 0.2% in 2024.

The former driver of its economic powerhouse, energy-intensive industry, has been sputtering since Russia’s invasion and has turned into a serious thorn in the country’s side.

Germany’s Purchasing Managers Index (PMI) for its construction sector has been declining since early 2022. Manufacturing, meanwhile, has been in decline since mid-2023.

“Germany's manufacturing sector has been mired in recession since around the middle of last year, and the latest PMI readings signal another contraction in the first quarter of 2024,” Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, wrote.

“To make things worse, the downturn is very broadly based, encompassing capital goods as well as intermediate and consumer goods.”

It has ignited debates around whether Germany can once again be considered the “sick man of Europe,” having previously shaken off its post-Cold War title in the 1990s.

Deutsche Bank CEO Christian Sewing warned in September that Germany could become the sick man of Europe, citing spiraling energy costs and a shortage of skilled workers as some of the obstacles facing the country’s economy.

The boss of Germany’s central bank, Bundesbank, was forced to hit back at this unfortunate moniker, arguing that Europe as a whole was at risk of “getting sick,” rather than Germany in particular.

German businesses taking flight

RWE is one of several German businesses that appear to have had enough of Germany’s flatlining industry.

Analysis by fDi Markets shows German companies almost tripled their investments in the U.S. in 2023 to $15.7 billion.

The downturn of German industry was as much to blame for the flight of capital to the States and Joe Biden’s Inflation Reduction Act (IRA), which offered strong subsidies to incoming businesses.

Major carmakers like Volkswagen and Mercedes-Benz upped their commitments in the U.S.

RWE, meanwhile, announced a new U.S. arm called RWE Clean Energy after closing an acquisition for Con Edison Clean Energy Businesses. The group has set aside $15 billion to invest in its U.S. business.

“You have a coherent and comprehensive policy in the US to incentivize getting manufacturing back into the country,” RWE’s Krebber told the FT.

“Europe has the same intention, but not yet the right measures.”