ECB set to hike again

OVERNIGHT

Equity markets were mixed during Asian trading hours, as investors reaffirmed expectations of Fed rate cuts later in the year (despite that scenario being played down by officials) while at the same time taking stock of renewed US regional banking concerns. The US Federal Reserve last night once again raised its policy interest rates by 25 basis points to take the band up to 5.00%-5.25%. Just as significant, however, it also sent a signal that it may now pause and consider the impact of all its tightening moves. 

THE DAY AHEAD

Attention now turns to today’s European Central Bank (ECB) policy decision due at 13:15BST followed by the press conference from 13:45BST. Recent data show the Eurozone economy avoided a technical recession in Q1 and business surveys point to stronger activity at the start of Q2. Headline CPI inflation edged back up to 7.0% in April from 6.9% in March, but it has fallen from last October’s high of 10.6%. It is expected to resume its downtrend next month. Core inflation, however, has been stickier although it fell in April to 5.6% from 5.7%. The ECB’s latest bank lending surveys suggest that credit conditions have tightened and loan demand has fallen.

Policymakers have indicated that ECB interest rates will likely have to rise further. Following 350bp of hikes since policy tightening began last summer, there may a consensus among rate-setters for a smaller rise of 25bp to 3.25% for the deposit facility rate. Another 50bp increase is still on the table, but market pricing suggests a smaller hike is more likely.

ECB President Lagarde’s comments at the press conference will be closely examined for indications of future policy. At the last meeting in March, she said the central bank remained ‘data dependent’ but also commented that there would be ‘a lot more ground to cover’ if its baseline economic forecasts remained appropriate. Those forecasts assume lower economic uncertainty, but ongoing global financial sector concerns may temper some of the tightening expectations. Markets nevertheless anticipate another hike in June to 3.5%.

The final readings of the Eurozone and UK April services PMIs will be released this morning and are expected to reaffirm solid growth for the sector. UK mortgage approvals and broader credit data are also due. US data include weekly jobless claims and the monthly trade balance.

In the UK, there are local elections for about 70% of the electorate in England which may provide a hint of what to expect from the general election which must take place by early 2025. Today’s poll takes place only in England and in mostly rural areas (but also in some urban areas in the North), so the results should be interpreted with caution.

MARKETS

US Fed rate cuts are still priced in for this year with the first seen as potentially happening in September. Treasury yields fluctuated and are lower overall, as is the US dollar with sterling trading up towards $1.26 and the euro closer to $1.11.