Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 09/12/24
The ECB is set to lower interest rates further due to weak economic activity in the euro area
Global equity markets posted gains in the past week (MSCI All Country World Index: +1.3% wow), with all major US bourses at (S&P500: +1.0% wow, Nasdaq: +3.3% wow) or close to (Dow Jones Industrial) record highs. On Monday December 9th. US markets appeared to pause for a breather, inter alia ahead of November’s CPI report, due on December 11th.
The annual growth of the headline CPI will accelerate somewhat, to 2.7% from 2.6% in October, due to a further fading of the drag stemming from energy prices. Importantly, the core’s annual growth is expected to have held steady for a 3rd consecutive month at a resilient +3.3%. In that context and given also strong economic activity impetus, Federal Reserve Chair Powell suggested some cautiousness towards the speed of monetary policy easing.
Attention also turns to the meeting of the European Central Bank on December 12th. Taking also into account recent commentary from ECB officials, a -25 bps reduction of interest rates is expected, to +3.0% for the Deposit Facility Rate (DFR). Given that a rate cut appears likely, attention will also turn to the forward guidance, combined with President Lagarde’s Press conference as well as the quarterly economic projections, for a better assessment of monetary policy prospects.
The ECB will continue to lower interest rates in 2025 as the achievement of the 2% medium-term target for inflation is on track and policy remains restrictive. In the event, euro area’s headline CPI stood at +2.1% yoy on average in October – November, with the respective figure for the core CPI at +2.7% yoy. These readings suggest that price pressures likely lag the ECB staff’s projections back in September, which pointed to +2.6% yoy and +2.9% yoy, respectively, for Q4:2024 on average.
Regarding the inflation forecasting horizon up to 2026, ECB staff’s technical assumptions in September 2024 called for (average) Brent oil prices of $77.5/barrel from 2024 to 2026, natural gas prices of €37/Mwh, EUR/USD of $1.10 and an average 3-month Euribor of +2.8%. 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 of November 15th, mean expected values for 2024-2026 are €74/barrel (-4% compared with September), €36.5/Mwh (-1%), $1.09 (-0.6%) and +2.6%.
In all, recent readings and the aforesaid technical variables suggest that inflation projections by the ECB will probably move somewhat lower, with the alignment with the target possibly being modestly brought forward, compared with Q4:2025 in September’s exercise.
Concerns regarding euro area economic prospects remain, albeit euro area real GDP performance in Q3:2024 (+0.4% qoq) was above September’s ECB forecasts for +0.2% qoq (the same performance was foreseen for Q4:2024 as well), with the consumer showing some signs of pulse.
Nevertheless, increased political (France, Germany) and trade uncertainty, could weigh on economic confidence posing downside risks to economic activity. Recall that euro area PMIs so far in Q4:2024 have been subdued, with the composite index at a 10-month low of 48.3 in November, from 50.0 in October and 50.3 on average in Q3:2024.
Global equity markets posted gains in the past week (MSCI All Country World Index: +1.3% wow), with all major US bourses at (S&P500: +1.0% wow, Nasdaq: +3.3% wow) or close to (Dow Jones Industrial) record highs. On Monday December 9th. US markets appeared to pause for a breather, inter alia ahead of November’s CPI report, due on December 11th.
The annual growth of the headline CPI will accelerate somewhat, to 2.7% from 2.6% in October, due to a further fading of the drag stemming from energy prices. Importantly, the core’s annual growth is expected to have held steady for a 3rd consecutive month at a resilient +3.3%. In that context and given also strong economic activity impetus, Federal Reserve Chair Powell suggested some cautiousness towards the speed of monetary policy easing.
Attention also turns to the meeting of the European Central Bank on December 12th. Taking also into account recent commentary from ECB officials, a -25 bps reduction of interest rates is expected, to +3.0% for the Deposit Facility Rate (DFR). Given that a rate cut appears likely, attention will also turn to the forward guidance, combined with President Lagarde’s Press conference as well as the quarterly economic projections, for a better assessment of monetary policy prospects.
The ECB will continue to lower interest rates in 2025 as the achievement of the 2% medium-term target for inflation is on track and policy remains restrictive. In the event, euro area’s headline CPI stood at +2.1% yoy on average in October – November, with the respective figure for the core CPI at +2.7% yoy. These readings suggest that price pressures likely lag the ECB staff’s projections back in September, which pointed to +2.6% yoy and +2.9% yoy, respectively, for Q4:2024 on average.
Regarding the inflation forecasting horizon up to 2026, ECB staff’s technical assumptions in September 2024 called for (average) Brent oil prices of $77.5/barrel from 2024 to 2026, natural gas prices of €37/Mwh, EUR/USD of $1.10 and an average 3-month Euribor of +2.8%. 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 of November 15th, mean expected values for 2024-2026 are €74/barrel (-4% compared with September), €36.5/Mwh (-1%), $1.09 (-0.6%) and +2.6%.
In all, recent readings and the aforesaid technical variables suggest that inflation projections by the ECB will probably move somewhat lower, with the alignment with the target possibly being modestly brought forward, compared with Q4:2025 in September’s exercise.
Concerns regarding euro area economic prospects remain, albeit euro area real GDP performance in Q3:2024 (+0.4% qoq) was above September’s ECB forecasts for +0.2% qoq (the same performance was foreseen for Q4:2024 as well), with the consumer showing some signs of pulse.
Nevertheless, increased political (France, Germany) and trade uncertainty, could weigh on economic confidence posing downside risks to economic activity. Recall that euro area PMIs so far in Q4:2024 have been subdued, with the composite index at a 10-month low of 48.3 in November, from 50.0 in October and 50.3 on average in Q3:2024.