Global Economy & Markets, Weekly Roundup 03/06/24
The European Central Bank is expected to begin lowering policy interest rates on Thursday
Sensitivity of risk-free rates to inflation announcements has increased considerably, as major central banks are set to remove the top level of interest-rate restriction following a data-dependent approach. US Treasury and Bund yields whipsawed on Friday, after a compelling euro area inflation report and a weak reading of personal spending in the US gave conflicting views on the strength of the global economy.
German Government 10-Year yields increased at their highest levels since mid-November 2023 intra-week (2.70%), albeit have declined by 12 bps as of Monday June 3rd (2.58%). US Treasury yields were up by +4 bps wow bps to 4.51%. At the same time, global equity markets lost ground slightly (-0.8%). In the US, equity valuations remain high and corporate bond spreads are extremely tight, as investors price in a soft-landing outcome.
The European Central Bank on June 6th is likely to cut interest rates by -25 bps after circa nine months of holding them at multi year highs, as inflation has decelerated considerably and output, in real terms, has been broadly stagnant in the past twelve months. The quarterly economic projections will also be watched, while President Lagarde’s comments will be top of mind for investors.
In May, euro area CPI inflation increased by +2.6% year-over-year from +2.4% in April and +6.1% in May 2023. The outcome was slightly above consensus expectations (by +0.1 pp) with the core index leading the acceleration and suggesting, inter alia, that ECB officials will maintain a cautious stance towards the timing and the magnitude of further easing.
Indeed, core inflation readings have exceeded ECB staff’s projections back in March, with core CPI standing at +2.8% yoy on average in May-April, compared with ECB’s projections three months ago for +2.5% yoy on average in Q2:2024.
Regarding the inflation forecasting horizon up to 2026, ECB staff’s technical assumptions in March 2024 called for (average) Brent oil prices of €76/barrel from 2024 to 2026, natural gas prices of €31/Mwh, EUR/USD of $1.08 and an average 3-month Euribor of +2.7%.
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 May 10th, mean expected values for 2024-2026 are €78/barrel (+3% higher compared with March), €32/Mwh (+2.5%), $1.10 (+2%) and +3.1% (+40 bps).
The aforesaid technical variables suggest that core CPI projections by the ECB will probably continue to point to an alignment with the target by end-2025 and with the headline reaching 2% possibly some months sooner (Q3:2025), albeit with upside risks having strengthened, providing ground for patience towards the total amount of interest rate cuts in the next twelve months.
On economic activity, euro area’s quarterly real GDP growth of +0.3% in Q1:2024 exceeded ECB staff’s forecast back in March 2024 for +0.1% qoq sa. In addition, business leading indicators (PMIs) so far, suggest upside risks compared with ECB’s latest projections for +0.2% qoq sa in Q2:2024. As a result, a modest upward revision appears likely vis-à-vis forecasts of +0.6% real GDP growth in 2024 (by +0.1 to +0.2 pps), from +0.4% in 2023.
Sensitivity of risk-free rates to inflation announcements has increased considerably, as major central banks are set to remove the top level of interest-rate restriction following a data-dependent approach. US Treasury and Bund yields whipsawed on Friday, after a compelling euro area inflation report and a weak reading of personal spending in the US gave conflicting views on the strength of the global economy.
German Government 10-Year yields increased at their highest levels since mid-November 2023 intra-week (2.70%), albeit have declined by 12 bps as of Monday June 3rd (2.58%). US Treasury yields were up by +4 bps wow bps to 4.51%. At the same time, global equity markets lost ground slightly (-0.8%). In the US, equity valuations remain high and corporate bond spreads are extremely tight, as investors price in a soft-landing outcome.
The European Central Bank on June 6th is likely to cut interest rates by -25 bps after circa nine months of holding them at multi year highs, as inflation has decelerated considerably and output, in real terms, has been broadly stagnant in the past twelve months. The quarterly economic projections will also be watched, while President Lagarde’s comments will be top of mind for investors.
In May, euro area CPI inflation increased by +2.6% year-over-year from +2.4% in April and +6.1% in May 2023. The outcome was slightly above consensus expectations (by +0.1 pp) with the core index leading the acceleration and suggesting, inter alia, that ECB officials will maintain a cautious stance towards the timing and the magnitude of further easing.
Indeed, core inflation readings have exceeded ECB staff’s projections back in March, with core CPI standing at +2.8% yoy on average in May-April, compared with ECB’s projections three months ago for +2.5% yoy on average in Q2:2024.
Regarding the inflation forecasting horizon up to 2026, ECB staff’s technical assumptions in March 2024 called for (average) Brent oil prices of €76/barrel from 2024 to 2026, natural gas prices of €31/Mwh, EUR/USD of $1.08 and an average 3-month Euribor of +2.7%.
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 May 10th, mean expected values for 2024-2026 are €78/barrel (+3% higher compared with March), €32/Mwh (+2.5%), $1.10 (+2%) and +3.1% (+40 bps).
The aforesaid technical variables suggest that core CPI projections by the ECB will probably continue to point to an alignment with the target by end-2025 and with the headline reaching 2% possibly some months sooner (Q3:2025), albeit with upside risks having strengthened, providing ground for patience towards the total amount of interest rate cuts in the next twelve months.
On economic activity, euro area’s quarterly real GDP growth of +0.3% in Q1:2024 exceeded ECB staff’s forecast back in March 2024 for +0.1% qoq sa. In addition, business leading indicators (PMIs) so far, suggest upside risks compared with ECB’s latest projections for +0.2% qoq sa in Q2:2024. As a result, a modest upward revision appears likely vis-à-vis forecasts of +0.6% real GDP growth in 2024 (by +0.1 to +0.2 pps), from +0.4% in 2023.