ECB to cut rates today
The euro is largely treading water ahead of the ECB’s rate announcement later today, trading just below $1.09 against the dollar and just above 85p against sterling. A 25bps cut is fully priced for today’s meeting, so it will be what the ECB has to say about the outlook for monetary policy over the remainder of the year that will impact rate expectations (the market is currently pricing in a further 40bps worth of cuts by end-December) and hence the euro (though whether it will be enough for the latter to break out of its well-established trading ranges remains to be seen). Meanwhile, the pound is trading back up at around $1.28 against the dollar this morning.
Government bond yields fell again yesterday, despite a mixed bag of US economic data, with 10-year yields generally 3-5bps lower. Equity markets had a very positive session with European stocks gaining 1.7% and the S&P 500 up 1.2% to a new all-time high (tech stocks outperformed with the Nasdaq gaining 2% on the day).
Activity in the services sector of the US economy picked up in May judging by the latest ISM services index, which rebounded strongly last month (to 53.8) having fallen into contractionary territory (<50) in April. Separately, private sector employment rose by 152k in May according to the ADP report, slightly less than the consensus forecast and also down slightly from the 188k increase the previous month. The official jobs data for May are published tomorrow.
The Bank of Canada lowered interest rates by 25bps (to 4.75%) at its latest monetary policy meeting and pointed to further cuts ahead. It said that recent data has “increased our confidence that inflation will continue to move towards the 2% target”, adding that if its confidence “continues to increase, it is reasonable to expect further cuts to our policy interest rate”. The Canadian dollar fell against the US dollar and the euro initially but has since reversed almost all of its losses.
As well as the ECB meeting, economic data due today include Euro area retail sales; the construction PMI and inflation expectations in the UK; and jobless claims, the trade balance and unit labour costs in the US.