As widely expected, the European Central Bank (ECB) announced a 25bp rate cut when it met yesterday, but raised its inflation target for this and the next year, warned that the road for easing inflation could be bumpy, and ruled out a July rate cut. The market no longer prices a full rate cut by October. The ECB will remain data-dependent and probably Fed-dependent as well, without saying it aloud, because even though cutting the rates before the Fed was not expected at the start of this year and was courageous, an excessive dovish stance from the ECB could weigh on the euro and jeopardize the bank’s efforts to fight inflation.
Reflation trade is on
The Eurozone yields jumped after the ECB decision, but the Stoxx 600 hit a fresh record. The EURUSD is flirting with the 1.09 level. The ECB meeting wasn’t necessarily conclusive, but at the end of the day, two G7 central banks announced a 25bp rate cut this week, and marked the beginning of the easing cycle for major central banks – even though easing won’t be fast enough.
Elsewhere, the S&P500 reacted positively by hitting a fresh record. Sentiment in energy and metals was cheery yesterday, as the reflation trade saw support following the Bank of Canada (BoC) and the ECB rate cuts and a better-than-expected Chinese export print. The FTSE 100 gained and US crude rebounded past the $75pb despite an unexpected build in US oil inventories last week and could well settle between the $75/78pb level having seen a dip near the $72 support earlier this week, after the OPEC’s announcement to start waning its supply cut policy from the Q3. Copper found support near the 50-DMA while iron ore recovered a part of last week’s losses. Overall, I believe that the reflation environment should continue to give support to the energy and mining-heavy markets, as the major central banks step concretely into the policy easing phase – regardless of how cautious they are and how fast the rates will be pulled lower. It will all depend on inflation…
EUR/USD sees support after hawkish ECB presser, before US NFP data
Looking at the currency markets, the more hawkish than expected ECB stance regarding the future rare cuts is supportive of a further rebound in the EURUSD and I revise my EURUSD outlook to neutral from negative, because look, the ECB remains in a better position to cut rates and should proceed with one more rate cut before the year ends. However, the Euro area surprise index improves although the expectations regarding the Euro area economy remain soft: the Eurozone is expected to revise the Q1 GDP growth from none to 0.3% today. In the meantime, the US data surprises to the downside with the US economic surprise index printing the most disappointing levels since 2019. Atlanta Fed’s GDP Now index rebounded past the 2% this week, but looks choppy. Therefore, the fast deteriorating US outlook, and slightly improving Eurozone outlook narrow the gap between the Fed and ECB expectations, and the latter could throw a floor under the EURUSD at the wake of the first ECB rate cut.
Today, all eyes turn toward the US jobs data. The week was marked by softer-than-expected job openings in April, a significantly lower-than-expected May ADP report, a surprise decline in the pace of unit labour costs from 4.7% to 4% and an unexpected jump in US weekly jobless claims. The consensus of analyst estimates on Bloomberg bet that the US economy may have added around 180K new nonfarm jobs last month, the unemployment rate is seen steady near 3.9% and wages growth may have slightly accelerated on a monthly basis. A soft jobs report should support the dovish Fed expectations and further weigh on the US dollar. The dollar index remains sold at the 100, 200-DMA area this week and has potential to decline with a soft set of data into next week’s FOMC meeting. Whatever today jobs data says, the Fed isn’t expected to cut rates when it meets next week, the Fed members sounded very cautious regarding their inflation expectations, therefore the new dot plot will probably show one or maximum two rate cuts on average this year – down from 3 expected rate cuts at the latest plot. But that’s mostly priced in and could be the peak hawkishness for the Fed this year – if the economic data continues to disappoint.
Do antitrust allegations really matter?
Nvidia eased after hitting a fresh ATH yesterday, and Microsoft consolidated gains above $420 a share on news that the US opened antitrust investigations into two of the world’s most valuable companies due to their dominance in the rapidly emerging field of AI. Nvidia was accused to sell chips to customers that are most likely to use them quickly, and Meta, Amazon and Alphabet stand for about a third of Nvidia’s revenue. But note that these antitrust investigations against the Big Tech companies are common and have not prevented their stock prices from rising thoroughly in the past.
