What now for the ECB?

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STOXX Europe 600 up 0.6%

Euro zone inflation drops

U.S. stock futures tick up

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The ECB's (European Central Bank) next policy moves are in the spotlight today after euro zone inflation eased more than expected last month.

Further fuelling the debate are minutes for its May 3-4 meeting. Released in the last hour they show that many European Central Bank policymakers preferred a larger rate hike last month but agreed to a 25 basis-point (bp) move.

For Simon Harvey, head of FX analysis at Monex Europe, today's data means the ECB is unlikely to raise the deposit rate above 3.75%, greatly reducing the probability of a September hike. But he does still foresee 25 bp hikes at each of the June and July meetings.

He points to ECB President Christine Lagarde's comments following the data, as evidence that "ECB officials aren’t wholly comfortable that the disinflation process is fully formed".

Of a similar opinion is Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics.

"While further gradual declines in the core rate seem likely, we don’t think that will stop the ECB from raising interest rates in June and probably July," wrote Allen-Reynolds.

Any reduction in global interest rates is now more likely in 2024, says Daniele Antonucci, chief Economist & macro strategist at Quintet Private Bank, an expectation that contrasts with what markets are pricing in.

"The level of inflation, at just above 6%, remains elevated and at a level that’s likely to continue to make the European Central Bank uncomfortable," wrote Antonucci in a note.

He expects the Fed to hold rates for the rest of 2023, and thinks a few more rate increases in the euro zone and Britain seem probable.

(Lucy Raitano)



Cash on corporate balance sheets is starting to earn a healthy return and equity investors have surely taken notice.

But while the general trend this year has seen cash-rich stocks significantly outperform those with high gearing, Jefferies has dug deeper, unearthing some good insight.

Desh Peramunetilleke, Global Head of Microstrategy at Jefferies, has revealed that even though both U.S. and Europe are the "most geared regions and have the least amount of cash" the impact of current rate dynamics varies widely.

Corporate America looks better off than Europe Inc and that boils down to its lower exposure to costly short-term debt. And that, in turn, should help U.S. companies squeeze more out from higher-interest income.

As a result, Peramunetilleke sees U.S. interest costs falling (yes, FALLING) by a net of more than 9%, whereas he sees an 8% net rise for European developed markets.

Not bad, is it?

Short-term debt in Europe is 24% of the total, more than twice the 11% proportion for the U.S., according to Jefferies.

(Danilo Masoni)



Central banks are in ‘whatever it takes’ mode in their inflation fight and have already clarified that they can go on with measures to tame price rises while ensuring the financial system's stability.

But still, some investors fear that the Fed and the ECB might not come out on top.

"Intermittent cash injections and forced consolidation of the sector kept the banking crisis somewhat in check while they carried on raising their interest rates, but prospects remain uncertain on both fronts, i.e. the financial health of U.S. banks as well as the final victory over inflation," said Patrice Gautry, chief economist at Union Bancaire Privée (UBP).

"We do not expect core inflation to ease back to 2% any time soon, and probably not until 2025," he added. "Central banks will have to trigger disinflation in services, an area that is less sensitive to key rate fluctuations."

While monetary policy has tightened, fiscal policy has remained expansionary with the support to households and industry in response to the Covid and energy crises.

"By 2024, budgets are likely to be reined in again as debt-servicing costs rise, rating agencies put pressure on both companies and governments, and the political will to control debt strengthens in the U.S. (i.e. Congress) and the EU (renewed Maastricht criteria)," Gautry added.

Given such a backdrop, a hawkish monetary policy might slow the economy too much, while cutting rates too fast wouldn't be conducive to stabilising the economic cycle.

"As financial conditions normalise, this (a reversal of overly-compressed asset price risk premia) may expose fragilities and fault lines in the financial system," said the ECB Financial Stability Review of May 2023, adding "non-bank financial intermediaries remain heavily exposed to a turning financial cycle, despite ongoing de-risking."

(Stefano Rebaudo)



With banking woes on the back burner, and a last minute deal struck to resolve the U.S. debt ceiling debacle, markets have entered a new month on a resilient note.

But Thomas Hempell, head of macro and market research at Generali Investments Europe, is telling investors to "mind the widening gaps" when it comes to global equities.

Markets might feel emboldened by hot labour markets and pent-up post-pandemic demand, he says, but global manufacturing PMIs are signalling stagnation, and the gap with services PMIs is at its widest since at least the global financial crisis.

"Most importantly, the sharpest tightening of monetary policy since the 1980s is still to unfold. Don't be lured by still robust US activity. Recession is looming for the coming quarters".

China's reopening "has disappointed before it even started", he adds, and global trade is in the doldrums.

While headline inflation is set to recede on base effects and lower energy prices, underlying price pressure will keep major central banks on a restrictive policy path for longer.

"A Fed pivot is not on the cards before Q4 and not before mid-2024 for the ECB," writes Hempell.

He highlights the divergence between the inverted yield curve, signalling recession, and HY and equity markets which seem to disagree on timing.

And it is those two parts of the market that he views as the most vulnerable.

Upcoming suffering for earnings, and currently dear valuations, point to more pain ahead.

(Lucy Raitano)



European shares rose on Thursday with comments from Fed officials pointing to a rate hike "skip" in June fuelling a bounce back across risky assets and helping the STOXX Europe 600 .STOXX recover most of Wednesday's losses.

The region-wide European equity benchmark was up 0.7% from two-month lows hit on Wednesday. Eyes in less than one hour will be on the euro area May flash inflation reading which is expected to show a continued easing of price pressures.

The rebound saw most sectors rise, while real estate, utilities and telecoms weakened. Oil stocks .SXEP led the bounce, up 1.3% as crude prices rose, helped by the potential pause in U.S. rate increases.

(Danilo Masoni)



European shares were set to kick off the new month on a positive footing ahead of euro area inflation numbers for May that could shows more signs of easing price pressures and shape expectations for the likely path of monetary policy.

EuroSTOXX50 futures rose 0.8% and those on commodity heavy FTSE added 0.2% after losses on Wednesday that drove the region-wide STOXX Europe 600 to end May at two-month lows. S&P 500 futures steadied following a weak close on Wall Street.

In the corporate world, the news flow was thinning out, as earnings season winds down. There were still some quarterly reports for investors to look at.

French spirits group Remy Cointreau RCOP.PA reported a higher-than-expected rise in operating profit for its fiscal year and stuck to its cautious prospects for this year.

Slowing revenue growth at Salesforce could weigh on shares at German software maker SAP SAPG.DE, while fashion retailer Hugo Boss BOSSn.DE could get some support from a surprise quarterly profit from U.S. department store chain Nordstrom.

Eyes also on Infineon IFXGn.DE, which said it was looking for acquisitions worth up to 3 billion euros. Minor acquisition for Lonza LONN.S which agreed to buy Synaffix for up to 160 million euros ($176.13 million). In the UK, autocatalyst maker Johnson Matthey JMAT.L is planning to sell its medical device components business, according to Bloomberg.

(Danilo Masoni)



It's a volatile time for central bank watchers, when comments from one man can flip the script in a moment.

Of course, the man responsible for the latest twist is a closely followed Fed governor and vice chair nominee, Philip Jefferson, but still, his comments led bets on the next Fed policy move on June 14 to retreat from a 70% chance for a quarter-point increase to just 38% at latest check.

Jefferson said he favoured "skipping" a rate hike at the upcoming meeting and that term has started to displace "pause" among Fed officials. Some Fed watchers believe this conveys a slightly more hawkish nuance.

Bets for ECB tightening have been knocked back, too, most recently by weaker-than-expected CPI data from Germany and France. That puts the spotlight on the euro-area preliminary CPI reading for May, due later in the day, which now seems likely to come in below forecasts.

The euro zone's central bank will also release the summary of its meeting a month ago, when rates went up by a quarter point, and there will be fresh comments from ECB chief Christine Lagarde, who speaks at a banking conference in Hanover.

Traders currently foresee slightly more than 50 basis points of ECB tightening left before an expected peak in January.

Among a sizeable smattering of other European data in the day ahead are factory PMIs from the euro zone and many of its biggest members, including Germany and France, as well as from Britain and the United States.

In a positive prologue to those, Chinese factory activity posted a surprise swing to growth last month. Japan's reading also rebounded.

Investors seemed to be in a good mood across most of Asia, pushing stocks higher with encouragement from those more dovish Fed bets and relief at the U.S. House of Representatives passing a bill to suspend the debt ceiling - and avert a catastrophic default - with a big bipartisan majority. That's a strong indication that the bill could get through the Senate before the weekend.

Key developments that could influence markets on Thursday:

German retail sales

UK house prices and mortgage lending

Euro zone, Spain, Italy, France, Germany, UK and U.S. manufacturing PMIs

Italy and euro zone unemployment rate

U.S. ADP jobs report and weekly jobless claims

U.S. ISM manufacturing

(Kevin Buckland)


($1 = 0.9084 euros)

ECB eases the pace of interest rate hikes https://tmsnrt.rs/3NzdjqE

Powell's policy sprint https://tmsnrt.rs/3qQdxgq

eu open https://tmsnrt.rs/43vXpC2

ESTRfwd https://tmsnrt.rs/3C5Q8gB

Jefferies interest costs https://tmsnrt.rs/43wd4Bk


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