19 July 2024
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ECB keeps rates unchanged

Daily Outlook 19 July 2024

By Jeanne Walters

As was widely expected the ECB elected to keep the deposit facility rate unchanged at 3.75%. The committee highlighted that there was no pre-committed path for interest rates and that each rate decision would be data dependent. The ECB next meets in September, with Christine Lagarde suggesting that the outcome of that meeting remained “wide open”. Markets are currently pricing in an 80% chance of a rate cut in September.

Egypt's central bank also held rates steady yesterday, leaving the benchmark overnight deposit rate at 27.25%. Another hold by the CBE had also been anticipated as while inflation has been slowing since the official devaluation of the pound in March eradicated the parallel exchange rate, real interest rates are still negative with headline CPI at 27.5% in June. With subsidy cuts being implemented, the CBE will want to be sure of the disinflationary path before implementing its first rate cuts. We forecast a cumulative 200bps of cuts in the fourth quarter.

There were some signs of a cooling in the UK labour market, with average weekly earnings (excluding bonuses) growing at their slowest pace in almost two years, rising 5.7% y/y in the three months to May, down from 6% in April. Private sector regular pay growth also ticked down to 5.6% 3m/YoY in May from 5.9% previously. The unemployment rate remained unchanged at 4.4% in the three months to May.

There was also evidence a moderation in the US labour market, with initial jobless claims rising sharply in the week ending 13 July, jumping 20k to 243k. Continuing claims for unemployment benefits also rose by 20k to 1.87m in the week ending 6 July, its highest level since November 2021, suggesting that it is taking unemployed workers longer to find a new role.

Japanese consumer prices excluding fresh food rose to 2.6% y/y in June, up marginally from 2.5% in May. The rise was a little lower than the 2.7% gain that had been expected by markets but will nonetheless add to the case for the Bank of Japan to hike rates when they meet at the end of the month.

Today’s Economic Data and Events

  • 10:00 UK Retail sales (Jun): forecast -0.6% m/m

Fixed Income

  • US Treasury yields saw small gains on Thursday. Yields on the 10yr UST rose 4bps to at 4.2021%, while the 2yr yield gained 3bps to reach 4.4714%.
  • Bond yields amongst the large Eurozone nations rose, in most cases gaining between 1 – 2bps on the day. The 10yr German Bund yield gained 1bps to 2.43%. The 10yr UK Gilt, in contrast, fell 1bps to reach 4.0623%.
  • Masdar’s issuance of USD 500m 5yr green bonds were priced at T+95, while another USD 500m of 10yr maturity were priced at T+115.RAK Bank’s issuance of USD 600m 5yr bonds were priced at T+135.

FX

  • The US dollar rebounded over the course of Thursday, with the dollar spot index rising 0.4%. EURUSD reversed the previous day’s gain, dropping 0.4% to close the day at 1.0897, while GBPUSD fell 0.5% to 1.2944. USDJPY gained 0.75% to close at 157.37.
  • Commodity currencies were generally weaker against the dollar on the day. AUSUSD fell 0.3% to 0.6706, NZDUSD declined by 0.6% to 0.6045, and USDCAD rose by just under 0.2% to 1.3706.

Equities

  • US stock markets fell on Thursday, after an initial rally by technology stocks faded. The S&P 500 declined 0.8%, the NASDAQ fell 0.7% and the Dow Jones dropped 1.3%.
  • Declines were also seen across major European equity markets after the ECB left interest rates unchanged. The Euro Stoxx 50 dropped 0.4% and the DAX fell by 0.5%. The FTSE 100 gained 0.2%.
  • Locally, the DFM rose 0.9% and the ADX gained 0.7%.

Commodities

  • There was little movement in oil prices on Thursday, with no major announcements at the end of the 3rd Plenum gathering in China. Brent futures gained a marginal 0.04% to USD 85.11/b, while WTI declined by an equally marginal move to USD 82.82/b.

Written By

Jeanne Walters Senior Economist


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