Key jobs data in the US today
The ECB cut the deposit rate by 25bps to 3.75% at yesterday’s meeting, as widely expected, but gave little away about its future intentions. Market rate expectations are little changed post the meeting, with around 45bps worth of cuts still priced in by the end of this year. The euro is also largely unchanged, trading just shy of $1.09 against the dollar and at 85.1p against sterling (with the latter trading at around $1.28 this morning). Attention now turns to today’s employment report in the US. Generally softer than expected economic data have weighed on the dollar recently, which has retreated from its 2024 to date highs in mid-April, and weaker than forecast jobs data today could see it lose more ground (though of course stronger data would probably see it erase some of its recent losses).
Elsewhere in markets, German 2- and 10-year government bond yields were modestly higher post ECB, increasing by around 4-5bps on the day, while US and UK yields ended little changed and marginally lower respectively. European stocks advanced again, gaining a further 0.7% after closing around 1.6% higher on Wednesday, while the S&P 500 in the US ended a touch below the previous day’s all-time high.
Explaining yesterday’s rate cut, the ECB noted that the inflation outlook had “improved markedly” since it last raised rates in September 2023, allowing it to “moderate the degree of monetary policy restriction.” However it cautioned that “domestic price pressures remain strong…and inflation is likely to stay above target well into next year.” It also said it “will keep policy rates sufficiently restrictive for as long as necessary” to return inflation to the 2% target, and reiterated that is not pre-committing to a particular rate path. Keeping policy sufficiently restrictive does allow it to cut interest rates further though, as rates are well above estimates of the neutral nominal interest rate, though it seems set to proceed cautiously in doing so with the next cut unlikely to come until September at the earliest.
Post-meeting commentary from ECB Governing Council members has started to arrive. Kazaks says “the labour market is tight and unemployment is low, which keeps upward pressure on wages, therefore further reductions in interest rates should be gradual,” while his colleague Muller says “the central bank needs to make its decisions rather cautiously and not to rush too much with cutting rates.”
Regarding today’s employment report in the US, the consensus expects the economy to have added 180k jobs in May, following a gain of 175k in April, with the unemployment rate seen remaining at 3.9% and year-on-year wage growth expected to be unchanged at 3.9%. Other data due include a final estimate of Euro area GDP growth in Q1 – the previous estimate showed the economy expanded by 0.3% q-o-q, having contracted slightly in the final quarter of 2023.