Market expectations of rate cuts for the US Federal Reserve and the European Central Bank have changed again. Between Wednesday and Thursday of this week, another rate cut has been erased from the calendar that investors expect for the coming monthsand now the roadmap that the markets expect points to a scenario of 4 cuts of 25 basis points by the Fed until June of next year, and 5 cuts of the same caliber by the European Central Bank. What has changed for investors to make that turn? Several macroeconomic data released in recent days in both regions have been surprisingly strong, including inflation and employment data in both the United States and the Eurozone. This, in the opinion of investors, is a sign that central banks will not be able to lower rates as quickly as was being discounted.
What is happening this month of October on the monetary policy front is reminiscent of what was already experienced at the beginning of 2024. At that time, when the year was taking its first steps, expectations were that the economy of the United States and the euro zone would go through a very difficult year; so much so that the central banks of these two regions would be forced to begin lowering rates aggressively from the beginning of the year, since they would need to boost economic growth, and they would not have to worry about inflation, since it would be infected. due to the economic slowdown and would gradually fall towards the objective of the central bankers. In the end, this was not the case, and both the United States and Europe enjoyed stronger than expected economic growth, although in the Old Continent the weakness was more evident than in the North American country.
The current situation is showing some parallels with what was experienced then. Once the ECB, and then the Fed, began to lower rates, in June and September, respectively, the markets have priced in a scenario of continued cuts in the price of money, which will extend throughout next year. However, The pace at which the money lords are expected to lower rates in this period is reducing, and the change in outlook has been especially strong in the month of October.
At the beginning of the month, the market was pricing in 7 rate cuts of 25 basis points until September 2025 by the US Fed. These perspectives moderated as the days went by, until they expected 5 rate cuts in the same period, a scenario that has continued until this Thursday: a change has occurred again, and the market now only expects 4 rate cuts 25 basis points; The first will be in the November meeting, according to investors, and the other three between the meetings in January and June 2025.
In the case of the ECB, the change has been very similar: if on Wednesday seven rate cuts were expected until September of next year, now this scenario has been reduced to 5 cuts. The latest change occurred this week, after investors received GDP data for the third quarter of the euro zone and preliminary inflation data for the month of October.
Inflation holds stronger than expected
The turnaround that has occurred in the United States and the euro zone with the prospects of interest rate cuts is explained by the macroeconomic data that have been published this week. In the North American giant, the employment data for the month of October that was published on Thursday showed that 233,000 jobs were created during the month, and analysts’ forecasts pointed to a figure that was half as good: 111,000 hires. The importance of employment is now key for the Fed, which has publicly acknowledged that it is now the indicator it most monitors when deciding its monetary policy. If employment continues to be strong, the scenario of rate cuts for the Fed becomes more complicated, since it finds a more dynamic economy than expectedand a cut in the price of money could push inflation back up, the last thing Fed members want to see right now.
This, together with the GDP deflator that was published on Thursday (an inflation indicator that the Fed pays close attention to when analyzing the situation of the US economy), which also exceeded expectations (core inflation rose to 2.7 %, compared to estimates that pointed to 2.6%), has been the icing on the cake that investors needed to erase another rate cut from the map.
Eurozone data has helped fuel inflationary pressures. The advance GDP data for the third quarter in the Union as a whole has surprised analysts, with an increase of 0.4% compared to the previous quarter, above estimates, which pointed to 0.2%. In addition, the first inflation data for October was also higher than expected, up to 0.3% month-on-month, compared to estimates of 0.2%.
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