ECB meeting the focus today
Yesterday’s inflation data in the US were marginally firmer than the market expected, providing some modest support to the dollar. The euro and sterling have both slipped a little further against the US currency to trade at around $1.1015 and $1.3050 respectively this morning, leaving EURGBP largely unchanged just below £0.8450 as it continues to trade in a very tight range. The focus today will be on the ECB monetary policy meeting. A quarter-point cut (to 3.5%) in the deposit rate seems a done deal, so of more interest will be what the ECB has to say (if anything much) about the likely pace and timing of further rate cuts.
The firmer inflation data halted the decline in US bond yields, with both 2-and 10-year yields edging higher yesterday. UK yields fell further though, by 5-7bps, as the market continued to price in a bit more in the way of BoE rate cuts over the remainder of this year (about 50bps is now expected), while German yields nudged lower as well. In equity markets, the Nasdaq again led another rise in US stocks, gaining more than 2%, while European stocks added almost 0.5%.
The headline CPI in the US rose by 0.2% in August and the annual rate of inflation fell to 2.5% (from 2.9% in July) according to yesterday’s data, both as expected. Core consumer prices (which excludes energy and food prices) increased by 0.3%, slightly firmer than expected, and the year-on-year rate remained at 3.2%. Over the three months to August core prices rose at an annualised rate of just 1.9% (from the three months to May), which will be quite reassuring from the Fed’s point of view.
The market fully expect the ECB to lower rates by 25bps for a second time at today’s meeting and is pricing in almost 65bps worth of cuts in total by the end of this year, with the deposit rate seen falling further to around 2% – which is in line with the ECB’s estimate of the neutral interest rate – by this time next year. For the ECB though, ongoing concerns about elevated services inflation may mean it again strikes a cautious note, reiterating that it will keep rates “sufficiently restrictive for as long as necessary” to ensure inflation returns sustainably to the 2% target. If so, it would point to December as the likely date for a third cut in the cycle.
On the economic data front, producer prices and jobless claims are scheduled in the US today.