ECB cuts interest rates by 25bps

As had been widely anticipated, the European Central Bank elected to cut interest rates for the first time in almost 5 years at their meeting yesterday. The 25bps cut leaves the deposit rate at 3.75%. Market expectations for a further cut at the July meeting moderated marginally after the announcement, with the committee highlighting that they were “not pre-committing to a particular rate path”. The ECB also released updated forecasts, with inflation expected to average 2.5% in 2024 (previously 2.3%). Inflation is now only expected to fall below the 2% target by 2026, rather than 2025. Forecasts for growth were also revised higher, reaching 0.9% (previously 0.6%) in 2024 and 1.4% in 2025.

Eurozone retail sales fell sharply in April, declining 0.5% m/m. Expectations had been for a smaller, 0.3% m/m fall. The decline in sales was broad-based across both spending categories and countries. On an annual basis retail sales were flat. Despite the drop in April, the outlook for consumers is expected to improve over the year, as inflation gradually moderates. 

German factory orders fell 0.2% m/m in April, after falling 0.8% the month prior. While expectations had been for a 0.6% m/m rise, the headline figure was primarily held back by a decline in large orders (those over €50m). The drop in large orders was attributable to a fall in orders for ships, aircraft and trains, offsetting a rise in new automotive orders.

US initial jobless claims for the week ending 1 June rose unexpectedly to 229k, from 221k the week prior. While some of the uptick might be due to seasonal adjustment issues related to the Memorial Day holiday, the 4-week moving average of initial claims has been trended upward over the past month. That chimes with several other labour market indicators starting to suggest there is a degree of cooling.

Today’s Economic Data and Events

10:00 GE industrial production (Apr), Forecast: 0.2% m/m

16:30 US nonfarm payrolls (May), Forecast: 185k

Fixed Income

US treasury yields ended Thursday broadly flat, with the 2yr yield at 4.7240% and the 10yr yield at 4.2870%. Outside of the UK, moves in major European bond yields were generally lower, with the ECB cutting rates but raising its inflation forecast out to 2026. The 10yr Bund yield gained 4bps to 2.548%. The UK 10yr Gilt yield in contrast fell 1bps to 4.1728%.

FX

The dollar was weaker against major peer currencies on Thursday, ahead of the nonfarm payroll print due today. EURUSD gained 0.2% to reach 1.089, GBPUSD rose by 0.03% to 1.2791, and USDJPY fell 0.32% to 155.61.

The dollar was also weaker against major commodity currencies. NZDUSD gained 0.1% to 0.6199, while AUSUSD rose 0.27% to 0.6666. USDCAD fell 0.18% to 1.367.

Equities

US equity markets were largely flat on Thursday, with investors looking ahead to nonfarm payroll numbers and their potential impact on the Fed. The S&P 500 fell 0.02%, the NASDAQ declined 0.09% and the Dow Jones rose 0.2%.

European equity indices rallied to near all-time highs after the ECB rate cut on Thursday. The EuroStoxx 50 index gained 0.66%, while the CAC 40 and DAX both rose 0.4%. The FTSE 100 gained 0.47%.

Moves in local markets were muted on Thursday, with both the DFM and ADX broadly flat.

Commodities

Oil prices rebounded further on Thursday, fueled by rising hopes of a possible Fed rate cut later this year. Brent gained 1.86% to reach USD 79.87/b, while WTI rose 2% to USD 75.55/b.