Sticky Inflation Prompts Reappraisal of Fed Rate Cut Start Date

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Eurozone Market Update

As widely anticipated, the European Central Bank (ECB) kept its three key interest rates unchanged in its April meeting. The policy statement noted progress in most measures of underlying inflation, namely, that wage growth is gradually moderating and firms are absorbing some rising labour costs in their profits. However, it also noted that “domestic price pressures are strong” and “are keeping services price inflation high.” The bank maintained its soft guidance for an initial rate cut in June, and investors raised their estimate for the chance of a cut by the June meeting to 87% from 82%, with 83 bps priced in for the end of the year. Inflation data cemented expectations of a June cut, with annual euro area headline and core inflation unmoved from last month at 2.4% and 2.9%, respectively.

_{Source: Bloomberg, data as of 30 April 2024}

UK Market Update

While much of the economic data out of the UK in April was generally in line with expectations, data related to inflation and employment were less encouraging. While annual headline and core inflation figures for March were down to 3.2% and 4.2%, respectively, they missed market expectations. Services inflation, a metric closely monitored by the Bank of England (BoE), is still running strong at 6.0%. The UK’s labour print showed weakness in employment, with an ongoing contraction in the Labour Force Survey of 156,000 through to February, which translates to a 1.9% annualised decline. Payroll jobs dropped by 67,000 in March. The persistence of services inflation reduces the likelihood of the BoE making a move to cut earlier than August. Markets are pricing in a full cut by the August meeting, and 44 bps are priced in for the rest of the year.

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