The European Central Bank made a less accommodative move than expected when it pushed its first rate hike back from late 2019 to June 2020. The euro rose and stock markets lost ground on the news. Judging by this preliminar reaction, investors had thought that the ECB would bring in a larger raft of stimulus measures to get through the economic soft patch.
In the USA, weak job creation figures, which came in at 75,000 instead of the forecast 175,000, are not in themselves cause for concern, as they tend to be volatile from one month to the next. One positive sign, however, is wage growth, which remained moderate and should not push up inflation. That will strengthen the Fed’s argument as it adopts a more dovish tone.
Long-term interest rates dropped to a record low in Germany as manufacturing output slowed considerably. The annual yield on ten-year bonds now stands at –0.25%. This trend is spreading to the rest of Europe, including to lower-rated countries like Italy, where ten-year yields have fallen to 2.35%.
Did the late-May volatility change Powell’s (and Trump’s) mind?
A storm in the Pacific
To go deeper
A major change of course is taking place, and policy normalisation is now out-dated. In light of the potential slump in international trade and sharp decline in inflationary expectations, the Fed and the ECB have already announced rate cuts in the second half of the year.
The G20 summit ended with another truce in the spiralling trade war: President Trump withdrew his threat to impose tariffs on the remaining USD 300bn in Chinese imports and agreed to resume trade talks. However, he did not backpedal on the tariff hikes introduced in early May, or on setting a deadline for reaching a deal...
This week, all eyes will be on the US Federal Reserve, which is meeting on Wednesday evening. Investors will be looking for confirmation that the Fed is getting ready to cut rates over the summer. Jerome Powell mustn’t get it wrong, and the markets already seem to be pricing in one, if not two, rate cuts by the Fed’s September meeting...