ECB - Little to rattle markets
ECB lowered interest rates by 25bp (from 3.75% to 3.50%) for the second time this year with inflation receding towards 2% and concerns about the economy building fast.
- Although the ECB appears increasingly confident in the disinflation process, it steered well clear of giving any signals at all on the future path of policy – once again focus on “data dependency”
- Traders slightly reduced expectations of further easing – market now pricing in 38bp of cuts for the rest of 2024
- ECB trimmed its GDP forecasts for 2024, 2025 and 2026 whilst inflation outlook was broadly unchanged
German confidence plunged
After the recently not encouraging news from Volkswagen and Commerzbank, the ZEW Indicator of Economic Sentiment is also depressing for the German economy:
- The ZEW indicator plunged to the lowest level in almost a year
- The ZEW indicator declined to 3.6 points, 15.6 points below the value of the previous month, well below the expectations range of the analysts
- The ZEW indicator assessing the economic situation also worsened, reaching a new low that brings it back to pandemic levels
The Fed starts big ...
For the first time since the pandemic, the Fed cut rates and did so with a 50 basis point cut.
- The market now expects two more 25 basis points cuts this year
- Forecast currently tend to predict US rates falling to 3% by the end of the 2025
- Powell hinted that 50 basis point cuts are the exception
- The decision was accompanied by new estimates for inflation (now expected to be lower) and unemployment (revised slightly upwards)
- For the first time since 2005 the decision was not unanimous
- Market reaction so far has been relatively muted
... with others following shortly
Many other Central Banks will meet in the next couple of days including:
- Norges Bank – Today, seen keeping deposit rate at 4.50%. Analysts will be focusing on any adjustments to projections and easing early next year
- Bank of England – Today, no action expected. Focus will be on the wind-down of its fond portfolio and on hints concerning future cuts
- Bank of Japan – Tomorrow, with no action on rates expected. Market is currently expecting a move in December making messaging by the BoJ crucial
- On the emerging markets side we will have policy meetings in Turkey, Brazil and South Africa
Defensive stocks in vogue
As first cracks in labor market are appearing (and recession fears increasing) the hunt for more defensive sectors has started!
- Investors are turning from megacap technology stocks to consumer staples
- Consumer staples have outperformed the S&P 500 in 6 of the past 8 weeks – last week the sector enjoyed its best relative performance since 2020
- Strong interest has been detected in other “bond like” sectors such as utilities, telecoms and real estate
- The actual defensive pharma sector shows a mixed picture, mainly driven by news from the R&D segment
- Concerns about slower future earnings for tech stocks have grown rapidly, with investors beginning to reduce their positions
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