Market Round-Up

The European Central Bank (ECB) decided to hold its benchmark deposit rates steady at 4%, following its April interest rate meeting. A minority of policymakers argued for an immediate cut, as inflation nears the ECB target of 2%, having incrementally fallen from a peak of 10.6% in 2022 to 2.4% in March. However, the consensus was to wait until June before potentially making the first rate cut since 2019.

Jörg Krämer, chief economist at Commerzbank in Frankfurt, argued that: “It will take a lot of very bad inflation and wage data” for the ECB to not cut interest rates at the next session in June. Despite this, swap market traders slightly decreased the probability of a June rate cut from 75%, at the start of the day, to 70% after the meeting.

Meanwhile, in the United States, inflation rose to 3.5% in the 12 months to March, up from 3.2% in February, on the back of strong economic growth and price pressures in the service sector. Investors are now expecting the first Federal Reserve rate cut to materialise by either September or November, rather than at the previously anticipated July meeting.

Consequently, institutional investors, like Pimco and JPMorgan, have begun increasing their exposure to European government debt. This is because “the path for rate cuts in Europe is clearer than in the US,” according to Bob Michele, global head of fixed income at JPMorgan Asset Management. Thus, more bond price boosting interest rate cuts are expected in the Eurozone over the US.

An expansion in the manufacturing sector has helped the UK economy grow for a second consecutive month this February, with Gross Domestic Product (GDP) increasing by 0.10% between the first two months of the year. The figures, released by the Office for National Statistics, increase the likelihood of the UK economy growing in the first quarter of 2024, pulling it out of a technical recession, which it entered at the end of 2023.

The government has welcomed the news, with Chancellor Jeremey Hunt believing that “the economy is turning a corner.” Growth was not universal across sectors, with construction output falling by 1.9%, while the service sector expanded by 0.1%, and production, which includes manufacturing, mining and utilities, grew by 1.1%.

Some customer-facing sectors are still grappling with the fallout from the cost-of-living crisis. Output for restaurants, shops and hairdressers is still 5.7% below the February 2020 figure, seen before the pandemic.

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