Cautious Central Banks Emphasise Data Dependence in June Meetings

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Eurozone Market Update

The ECB concluded its June meeting with a cut of 25 bps across its three key interest rates. It became the second G7 central bank to ease policy this cycle after Canada, which also eased in June. The ECB Governing Council felt that a less restrictive policy stance was warranted by its updated assessment of the inflation outlook, underlying inflation dynamics and the strength of monetary policy transmission. The ECB reiterated their commitment to its data-dependent approach and stressed in its policy guidance that it “is not pre-committing to a particular rate path”. We view the hurdle for a July rate cut as extremely high and see September as the earliest the ECB could cut again. The announcement on 9 June of a snap election in France triggered a surge in the risk premium on French assets, with the spread between 10-year French OATs (government bonds and 10-year bunds rising by 28.6 bps over that week (See Chart of the Month). However, French markets responded positively after the first round of voting in which no party claimed a majority.

_{Source: Bloomberg, data as of 28 June 2024}

UK Market Update

As widely expected, the BoE kept the bank rate at 5.25%, with the voting pattern unchanged. Seven members voted to maintain the current rate, while two voted for a cut of 25 bps. The decision was considered dovish because the meeting minutes noted that it was “fairly balanced” as the BoE downplayed the impact of services inflation surprises with their expected outlook. The minutes emphasised the drop in Consumer Prices Index inflation from 3.2% in March to 2.0% in May and noted that indicators of short-term inflation are expected to moderate. Following the meeting, markets increased the chance of a cut by the August meeting to 62% from 34%. We see a summer cut of 25 bps as the most likely scenario, followed by an additional 25 bps cut in the fourth quarter.

_{Source: Bloomberg, data as of 28 June 2024}

US Market Update

The Federal Open Markets Committee (FOMC) left the target range for the federal funds rate unchanged at its June meeting. The statement was also mainly unchanged, with a small adjustment to the adjective of “modest” progress towards the committee’s inflation goal. While the outcome was expected, the market was more interested in the new release of the Summary of Economic Projections. This saw the central tendency of GDP growth revised down to 1.9%-2.2% from 2.0%-2.4% and core personal consumption expenditures inflation revised noticeably higher to 2.8%-3.0% from 2.5%-2.8%. The FOMC’s rate expectations moved from three cuts to two cuts for 2024. Consumer price inflation continues to moderate, with the monthly headline figure unchanged and the annual figure dropping to 3.3%. The core component rose just 0.2%, the softest since August 2021, with the annual increase down to 3.4%.

_{Source: Bloomberg, data as of 28 June 2024}

Looking Ahead

The June rate cuts by the ECB and Bank of Canada suggest a monetary easing cycle is starting, contingent on inflation decreasing. We still believe the Fed and BoE will likely cut rates in the coming months. In the U.S., inflation and the labour market are key focuses. Despite some soft spots in the labour market, job gains are still well above the breakeven rate for the economy. We expect inflation to continue to get closer to the Fed target by the end of the year. Therefore, we still expect two cuts this year. The ECB’s data-dependent approach emphasises domestic inflation drivers such as wages, productivity and profit margins. We continue to expect the ECB to cut two more times in 2024, with cuts totalling three for the year. Finally, the BoE’s ‘cherry-picking’ of data highlighted their dovish inclination. A summer cut of 25 bps remains our base case, followed by an additional 25 bps cut in the fourth quarter.

Chart of the Month

_{Source: Bloomberg as of 28 June 2024}

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