Weak growth data, aggressive rate cuts in the United States and contained inflation in the Eurozone are changing the pace of markets and interest rate analysts. Shortly after the ECB meeting in September, the market consensus was that the bank would wait until December. A thesis in line with the notes of members of the governing council who stressed that in December the bank would have more information at its disposal when making decisions.
However, the futures market has now turned around. According to Bloomberg data, derivatives traders are mostly betting on a cut at the meeting on the 17th. Specifically, the probability of a cut is 62%, up from 25% just a week ago. The change of pace is evident in the forecasts of some analysts, such as those at HSBC.
The British bank expects the ECB to cut rates at each of the meetings between now and April, including the one in October. That would leave rates at 2.25%, down from 3.5% currently and above a ceiling of 4%. “In its September forecasts, the ECB forecast headline inflation to be below target in 2026,” it says. “A further weakening of the demand outlook could increase the risk of inflation falling below target. So even if the labour market cools only gradually, more policymakers may become convinced that some pre-emptive cuts may be necessary,” the British firm says.
The futures markets broadly share the British bank’s outlook; the implicit rate discounted by derivatives is 2.18% after the April meeting. This means that they expect the ECB to cut by a quarter of a point per meeting, and they give a slight probability that the cumulative decline by that date will be somewhat greater.
HSBC analysts are not alone, however. “The data coming out of the eurozone reinforce our belief that the ECB will accelerate the pace of rate cuts in a row,” says a note from Goldman Sachs, which points out that “a cut in October is very possible with further pessimistic news.” The fall in the PMI indices published this Monday has been a turning pointindicating the first contraction in seven months due to problems in Germany and France, particularly in industry. “Although a fall in PMIs was expected in September, the magnitude suggests something more than a simple Olympic hangover. The risks of a sharper slowdown in activity have clearly increased,” explains HSBC.
A well-known hawk, Latvian Governing Council member Martin Kazaks, said yesterday that “the economy is weak, and if rates are kept too high for too long, it could lead to an unnecessary slowdown in the economy and an increase in unemployment.” However, he also insisted that service prices are a bigger concern. Another hardliner, Estonian Madis Müller, does not “totally” rule out a cut in October. Luis de Guindos also opened the door last Friday.
Schroders analysts also expect rate cuts from October onwards. “They have a different mandate to the Fed, focused on price stability, but I think there is room to cut rates in Europe. That would be our expectation,” Johanna Kyrklund, the firm’s chief investment officer for Europe, told Bloomberg TV in an interview. “It’s still a difficult environment for Europe. Germany is being squeezed by several trends: it used to be dependent on cheap Russian energy and exporting to China. That combination is quite complicated now,” she added.
The market is also considering the possibility that the ECB will not touch rates in October but will regain ground with a half-point cut in December. This possibility is being pointed out by MUFG analysts and is also being assessed by futures traders. These rate outlooks have also caused short-term interest rates on German debt to trade below those on 10-year debt for the first time, something that has not happened since November 2022, when at the beginning of the month the differential was 15 points.
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