ECB close to cutting rates

Investors clearly liked what they heard yesterday from Christine Lagarde, who indicated the ECB is getting close to cutting interest rates, with Europe leading a rally in equity markets. The dollar lost some ground in this so-called “risk on” environment and is trading at around $1.0940 to the euro and $1.28 to the pound this morning (leaving the euro-sterling cross once again largely unchanged at about 85.5p).

Bond yields fell initially on the back of Lagarde’s comments before (somewhat surprisingly) reversing course to end marginally lower on the day, though they are edging down at the open today. As mentioned, equity markets rallied with European stocks gaining more than 1% and the S&P 500 adding almost 1%.

The ECB kept interest rates unchanged but lowered its forecasts for inflation, which is seen falling further through the course of this year and dipping slightly below the 2% target in the second half of 2025. At the post-meeting press conference, Lagarde said the ECB is “more confident” that inflation is heading sustainably to 2% and indicated that this June is the likely date for a rate cut (noting also the inflation doesn’t have to be all the way back at 2% before policy is eased).

In much the same vein, in his second day of testimony to Congress, Fed Chair Powell, said “we’re waiting to become more confident that inflation is moving sustainably at 2%“, but noted that “we’re not far from it, and when we do get that confidence it’ll be appropriate to begin to dial back the level of (policy) restriction.” The market sees about an 80% chance of the Fed cutting rates by a quarter point at its June meeting.

The focus today turns to the latest employment (payrolls) report in the US.  The consensus expects the economy to have added around 200k jobs in February, following an increase of over 350k in January, with the unemployment seen remaining at 3.7% and annual hourly earnings growth falling back to 4.3% (having reaccelerated to 4.5% in January).