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ECB On The Chopping Block

Market Update

03.06.2024

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What happened last week?

US

  • Weak demand for new US Treasury bonds drove rates (and worries) higher.
  • House prices rose at their fastest pace in 19 months.

Asia

  • S&P Global Ratings boosted its outlook on India.

      Why It Matters

      Lukewarm demand for new Treasury bonds raised alarms about the increasing supply of US government bonds. Investors are worried that the cost of funding the country’s expanding deficit will push yields higher – and keep them there longer. This would have wide-reaching implications: elevated interest rates increase borrowing costs for companies, dampen consumer spending, and increase the appeal of cash.


      Sky-high mortgage rates and house prices to match haven’t been enough to hold US home prices down. The S&P Case-Shiller index, which tracks markets in 20 major US cities, showed a 7.4% increase in prices in March – the fastest yearly increase since October 2022 – as the shortage of homes on the market drew bidding wars.

      S&P Global Ratings upgraded its outlook for India to positive from stable, setting the stage for an important move higher in India’s credit rating. Right now, India’s on the very bottom tier of what’s considered “investment grade”: a label that signals that the risk of default is low. A step higher would make the country's government bonds even more attractive to global investors and lower its borrowing costs.

      This week’s focus: ECB On The Chopping Block

      The European Central Bank (ECB) was criticised for being late to the party two years ago when the world’s major central banks began raising interest rates to combat the fiercest inflation surge in a generation. But it looks like it won’t be late when it comes to cutting them. The ECB is expected to lower the bloc’s key rate to 3.75% when it meets on Thursday, down from its all-time high of 4%. The move would echo similar decisions made by smaller banks in the Czech Republic, Hungary, Sweden, and Switzerland, but would be a first among the world’s biggest economies.

      These cuts make some sense: the eurozone got the sharp end of the stick in the energy crisis sparked by Russia’s invasion of Ukraine.

      This shock pushed the region’s economy aggressively lower, eventually dragging inflation down with it as consumer demand dried up. Europe is recovering now, but not vigorously. The region’s sluggish growth suggests the eurozone could benefit from the economic stimulus that milder rates would bring.

      What happens next is far from certain, but the ECB won’t want to take its eye off the ball. After all, inflation is already proving bumpier than expected. Data released on Friday showed that headline and core inflation (which excludes volatile food and energy prices) both accelerated more than expected in May. There could be even more inflationary forces ahead – a strengthening economy, for one, and a lower exchange rate, for another. With Europe cutting its rates and the US Federal Reserve standing still, that’s likely to weaken the euro and strengthen the greenback, making imports pricier across the bloc. So the ECB is likely to take a go-slow approach, watching the economy of its 27 member states, while also keeping an eye on what’s happening in the US.

      The Week Ahead

      • Sunday: OPEC meeting, China Manufacturing PMI (May).
      • Monday: Manufacturing PMI for the US, UK, and eurozone (May).
      • Tuesday: China services PMI (May). Earnings: CrowdStrike, Hewlett-Packard.
      • Wednesday: US services PMI (May), PMI composite data for the UK and eurozone (May), Canada interest rate decision. Earnings: GameStop.
      • Thursday: ECB interest rate decision. Earnings: Nio, DocuSign.
      • Friday: US jobs report (May).

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