European Central Bank expected to cut rates in June European Central Bank expected to cut rates in June\images\insights\article\european-union-central-bank-small.jpg May 31 2024 May 31 2024

ECB expected to cut rates in June

If so, it could lead to policy divergence between the ECB and the Fed.

Published May 31 2024
My Content

The European Central Bank appears set to be the first major central bank to ease rates at its June 6 meeting. The markets have priced in a quarter-point cut. This could lead to a divergence from the Federal Reserve given stronger-than-expected U.S. economic data and the likelihood that it will maintain its current monetary policy stance. 

Eurozone inflation rose to 2.6% in May—up from 2.4% in April—but remains well below the 10% level reach reached in late 2022. The ECB benchmark deposit rate currently stands at 4%.

“The ECB is likely to begin its easing cycle next week, with a widely anticipated 25 basis-point cut,” says Orla Garvey, senior portfolio manager for fixed income at Federated Hermes Limited. “This is all but fully priced in by rates markets, but what comes after the next rate cut will be more difficult for the ECB to communicate and for markets to price.

“While significant progress has been made on bringing inflation back to target, the path of inflation from here is likely to be more turbulent. Combine this with an improving growth outlook across the eurozone, and markets may be less confident of the future path of ECB base rates, and lean towards pushing out some cuts in 2025,as has been the case in recent weeks,” she adds.

At the start of this year, the Fed was expected to lead the easing cycle, followed by other developed economies. Since then, however, investors have reined back expectations on the number of its anticipated cuts. The Bank of England, meanwhile, is widely expected to cut rates on August 1. Should the ECB move first, it may raise questions about the scope and size of the potential monetary policy divergence and the risk of exchange-rate volatility.

Fed doubts hit Treasuries 

Concerns that the Fed will keep rates higher for longer contributed to tepid buyer interest at U.S. government bond sales this week amid a spike in yields. The yield on the 2-year Treasury stood at 4.9% at 4:30 p.m. on Thursday, a rise of almost 16% since the start of the year, 

U.S. equities, meanwhile, continued their recent slide. The Dow Jones Industrial Average closed down 0.9% on Thursday while the Nasdaq Composite was down 1.1%. The only recent bright spot for investors was another set of blockbuster results from chipmaker Nvidia.

“This week saw the return of a narrow market as semi-conductors roared while the majority of the market languished in macro uncertainty,” says Louise Dudley, portfolio manager for global equities at Federated Hermes Limited.

“Though there are still many questions regarding the widescale adoption and monetization of artificial intelligence (AI), the microchip space has been wildly successful. The hungry demand for high-quality chips across mega caps and data centers suggests wider scale implementations of these models is on the horizon,” she says.

However, Dudley adds that a “healthy dose of scepticism” is required regarding the AI boom. “AI has been thrown around as a buzz word for a while now, but the path from implementation to profitability still needs to make sense,” she adds.

Tags International/Global . Markets/Economy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Dow Jones Industrial Average (DJIA or Dow): An unmanaged index which represents share prices of selected blue chip industrial corporations as well as public utility and transportation companies. The DJIA indicates daily changes in the average price of stocks in any of its categories. It also reports total sales for each group of industries. Because it represents the top corporations of America, the DJIA's index movements are leading economic indicators for the stock market as a whole. Indexes are unmanaged and investments cannot be made in an index.

Nasdaq Composite Index: An unmanaged index that measures all Nasdaq domestic and non-U.S.-based common stocks listed on the Nasdaq Stock Market. Indexes are unmanaged and investments cannot be made in an index.

Federated Hermes Limited