ECB cuts rates as expected

The European Central Bank cut its deposit rate by 25bps, in line with our and market expectations. Along with the rate cut, though, the ECB revised up their outlook for core inflation in 2024 and 2025 as they noted that “services inflation has been higher than expected.” However, growth forecasts were also revised slightly lower for 2024 through 2026 and the Governing Council said that risks to growth “remain tilted to the downside”. The ECB also said that it was not “pre-committing to a particular rate path,” leaving markets with few clues on what action the bank will take at its two remaining meetings this year (October and December) or over the course of 2025. Markets are pricing one more rate cut this year (December) and another four by the end of July 2025.

Inflation in India accelerated in August to 3.65% y/y, up from 3.54% a month earlier but still within the Reserve Bank of India’s target range of 4% +/- 2%. Food prices rose by 5.7% y/y while fuel and energy prices continued to decline, down 5.3% y/y in August. Inflation has been running below the 4% level for the past two months, clearing the way for the RBI to begin cutting rates. However, market expectations are only assigning about a 25% chance of a 25bps cut the RBI meets in early October.

Industrial production in India increased by 4.8% y/y in July, slightly faster than a month earlier but cooler than where activity had been for most of H1 24. Manufacturing improved to 4.6% in July, up from slightly more than 3% a month earlier. Mining activity was the major drag on industrial output, declining by14% m/m in July and slowing to growth of just 3.7% y/y.

Chinese premier Li Qiang met with leaders in Saudi Arabia and the UAE this week. He called for accelerating negotiations on a China-GCC free trade agreement and the deepening of trade and investment ties between China and the GCC countries.

Today’s Economic Data and Events

18:00 US University of Michigan Sentiment Sept (p): forecast 68.5

Fixed Income

• Treasuries we mixed on Thursday ahead of the Fed’s meeting next week. The 2y yield was fractionally lower at 3.639% but declined another 5bp in Asian trade this morning as of this writing. The 10y yield rose 2bp to 3.67% yesterday but is also lower this morning.
• Benchmark 10y yields rose across the board in Europe yesterday with bund yields gaining the most, up 3.8bp to 2.15%. However Asia/Pacific bonds have rallied this morning with NZGB down -3.2bp to 4.10% while ACGB declined -2.8bp to 3.82% at the time of writing. 10y JGB yield declined -2bp to 0.83%.

FX

• The dollar index fell -0.3% yesterday with AUD and CAD the main beneficiaries, up 0.2% and 0.1% respectively. EUR weakened -0.2% to 1.1022 following the ECB’s rate cut, while GBP declined -0.3% to 1.3051. JPY also lost ground against the dollar on Thursday but is trading firmer again this morning at 140.98/USD.

Equities

• US equity markets rallied again on Thursday, led by technology stocks. The Nasdaq100 rose 1% while the S&P500 gained 0.8%. European stocks also rose sharply with the EuroStoxx50 up 1.1% and the FTSE100 up 0.5%.
• Regional markets were mixed with the DFMGI rising 0.4% while the ADXGI declined -0.2%. The Saudi TASI closed 0.7% higher yesterday.

Commodities

• Oil prices rose again on Thursday as Hurricane Francine disrupted US crude production and as markets reflected a more risk-on tone. Brent rose 1.9% to USD 71.97/b while WTI rose 2.5% to USD 68.97/b.
• The IEA revised its oil demand growth forecast for 2024 lower in its September oil market report. The agency now expects demand growth of 0.9m b/d this year, down from 0.97m b/d previously. For 2025, the IEA left its growth forecast unchanged at 0.95m b/d but did still expect another year of demand contraction in developed markets.
• For 2024, the IEA estimates that demand growth is at its slowest pace since 2020 thanks to much softer consumption in China where apparent demand has declined year/year. Supply growth will be led by non-OPEC+ countries, namely the US, Guyana, Canada and Brazil. Taking the IEA’s demand projections as a base, OPEC+ would contribute to an oil market surplus in 2025 if it carries out its plan to increase production, even at a gradual pace.