Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 09/09/24
The ECB is expected to lower interest rates due to decelerating inflation and subpar growth
Markets stabilized on Monday (S&P500: +1.2%, Eurostoxx50: +0.9%) after a rough week amid concerns that the Fed will remain behind the curve despite weak labor market data. Non-farm payrolls have decelerated significantly to circa 115k and the unemployment rate was little changed, at 4.2% in August. The S&P500 fell by -4.2% wow, posting its largest weekly decline since March 2023 (regional US banking crisis).
US Government bond yields retreated significantly in the past week (10-Year: -20 bps to 3.71% | 2-Year: -28 bps to 3.65%), with the yield curve dis-inverting for the first time in 26 months as expectations for Fed cuts have been pull forward. Corporate bond spreads in the USD High Yield spectrum widened significantly by +26 bps to 339 bps (EUR: +11 bps to 359 bps).
Oil prices also declined severely (Brent: -9.8% wow to $71, its lowest level since December 2021) amid demand concerns due to weak Chinese data and expectations for a restoration of Libyan shut-in production. Notably, OPEC+’s decision to delay until December 1st its plan to gradually roll back 2.2 million barrels per day of voluntary cuts did little to reverse the downward trend.
Attention will turn to US political developments, with the first presidential debate between the Vice President Harris and the former President Trump being held on Tuesday.
On the other side of the Atlantic, the European Central Bank on September 12th is expected to reduce interest rates by -25 bps to 3.50% as inflation has decelerated considerably and output, in real terms, has disappointed somewhat in recent months. Attention will also turn to the forward guidance, combined with President Lagarde’s Press conference as well as the quarterly economic projections.
ECB staff’s technical assumptions in June 2024 called for average Brent oil prices of €79/barrel from 2024 to 2026, natural gas prices of €32/Mwh, EUR/USD of $1.08 and an average 3-month Euribor of +3.0%. Based on futures and FRA average prices in the two-week period ending on a probable cut-off date for the upcoming ECB staff projections (August 21st) mean expected values for 2024-2026 are €76/barrel (-3.5% compared with June), €37/Mwh (+15%), $1.11 (+3%) and +2.8% (-20 bps).
In all, technical assumptions will be inadequate to move medium term inflation forecasts meaningfully, with the headline CPI reaching 2% possibly in H2:2025. Taking also into account still persistent inflation pressures for Services (4.2% yoy), which account for 45% of the headline CPI index, the ECB will probably maintain a cautious stance towards the timing and the magnitude of further easing.
Financial markets, according to overnight index swaps, are increasingly leaning towards -75 bps of cumulative cuts by end-2024. Such pricing has come on the back of rather soft economic activity.
Indeed, euro area’s quarterly real GDP growth of +0.2% in Q2:2024 (revised down by -0.1 pp in the 3rd estimate), undershot ECB staff’s forecast back in June 2024 for +0.4%. In addition, business leading indicators (PMIs) so far, suggest downside risks to ECB’s latest projections for +0.4% qoq in Q3:2024. As a result, a modest downward revision by 0.1 to 0.2 pps appears probable, from forecasts of +0.9% real GDP growth in 2024.
Markets stabilized on Monday (S&P500: +1.2%, Eurostoxx50: +0.9%) after a rough week amid concerns that the Fed will remain behind the curve despite weak labor market data. Non-farm payrolls have decelerated significantly to circa 115k and the unemployment rate was little changed, at 4.2% in August. The S&P500 fell by -4.2% wow, posting its largest weekly decline since March 2023 (regional US banking crisis).
US Government bond yields retreated significantly in the past week (10-Year: -20 bps to 3.71% | 2-Year: -28 bps to 3.65%), with the yield curve dis-inverting for the first time in 26 months as expectations for Fed cuts have been pull forward. Corporate bond spreads in the USD High Yield spectrum widened significantly by +26 bps to 339 bps (EUR: +11 bps to 359 bps).
Oil prices also declined severely (Brent: -9.8% wow to $71, its lowest level since December 2021) amid demand concerns due to weak Chinese data and expectations for a restoration of Libyan shut-in production. Notably, OPEC+’s decision to delay until December 1st its plan to gradually roll back 2.2 million barrels per day of voluntary cuts did little to reverse the downward trend.
Attention will turn to US political developments, with the first presidential debate between the Vice President Harris and the former President Trump being held on Tuesday.
On the other side of the Atlantic, the European Central Bank on September 12th is expected to reduce interest rates by -25 bps to 3.50% as inflation has decelerated considerably and output, in real terms, has disappointed somewhat in recent months. Attention will also turn to the forward guidance, combined with President Lagarde’s Press conference as well as the quarterly economic projections.
ECB staff’s technical assumptions in June 2024 called for average Brent oil prices of €79/barrel from 2024 to 2026, natural gas prices of €32/Mwh, EUR/USD of $1.08 and an average 3-month Euribor of +3.0%. Based on futures and FRA average prices in the two-week period ending on a probable cut-off date for the upcoming ECB staff projections (August 21st) mean expected values for 2024-2026 are €76/barrel (-3.5% compared with June), €37/Mwh (+15%), $1.11 (+3%) and +2.8% (-20 bps).
In all, technical assumptions will be inadequate to move medium term inflation forecasts meaningfully, with the headline CPI reaching 2% possibly in H2:2025. Taking also into account still persistent inflation pressures for Services (4.2% yoy), which account for 45% of the headline CPI index, the ECB will probably maintain a cautious stance towards the timing and the magnitude of further easing.
Financial markets, according to overnight index swaps, are increasingly leaning towards -75 bps of cumulative cuts by end-2024. Such pricing has come on the back of rather soft economic activity.
Indeed, euro area’s quarterly real GDP growth of +0.2% in Q2:2024 (revised down by -0.1 pp in the 3rd estimate), undershot ECB staff’s forecast back in June 2024 for +0.4%. In addition, business leading indicators (PMIs) so far, suggest downside risks to ECB’s latest projections for +0.4% qoq in Q3:2024. As a result, a modest downward revision by 0.1 to 0.2 pps appears probable, from forecasts of +0.9% real GDP growth in 2024.