The European Central Bank could open the door to a weaker euro on Thursday as its first interest rate cut of the cycle sets the region on a divergent policy path from that of the United States.
With an almost certain quarter-point reduction, officials will finally agree to a widening of the difference between borrowing costs on the two sides of the Atlantic, the implications of which they have been discussing for months.
ECB policymakers, led by President Christine Lagarde, have insisted they are prepared to chart a course separate from that of the Federal Reserve, even if it risks leading to a weaker currency that could fuel the ‘inflation.
Tolerance from authorities will likely be an important element in their debate over possible further easing – especially after recent reports hinted at continued pressures on consumer prices. Most recently, data released Friday showed a gauge of core inflation that rose unexpectedly in May for the first time in a year.
The ECB can already see how divergent policy perspectives have started to impact global markets. The euro fell to its lowest level against the pound in almost two years on expectations that the Bank of England would lag behind the ECB in cutting rates.
What Bloomberg Economics says: “Bloomberg Economics forecasts a 25 basis point cut in June and, after a pause in July, further cuts of the same magnitude in September, October and December. »
Bank of Italy Governor Fabio Panetta acknowledged Friday that lower borrowing costs pose a currency risk to prices, but added that restrictive U.S. policy could also hurt global demand and thus dampen inflation in the eurozone.
His Austrian colleague Robert Holzmann has recently been more threatening, acknowledging that “the Fed, along with the dollar, is, figuratively, the gorilla in the room” for those responsible.
Thursday’s decision will include quarterly forecasts that will be scrutinized for clues about future policy intentions, much like Lagarde’s press conference. Money markets are currently betting on two cuts in total this year, with a slight chance of a third.
The Danish central bank is expected to follow the ECB’s decision by reducing itself by a quarter of a point just hours after the Eurozone results.
Elsewhere, U.S. payrolls and a suspenseful Canadian decision on a possible rate cut will be among the highlights of the week ahead.
United States and Canada
Following new data on inflation and spending in the United States, the government’s jobs report released Friday is expected to show further steady job growth in May. The median forecast in a Bloomberg survey calls for an increase of 190,000, a slight acceleration from the previous month.
This would cause average employment growth to slow over the past three months, confirming the slowdown in labor demand. The unemployment rate, based on a separate household survey, is expected to remain at 3.9%.
The average hourly wage is expected to increase by 3.9% from May 2023, matching the previous month’s annual gain. Even though wage growth remains at its lowest level in three years, wage gains remain higher than before the pandemic.
The Labor Department will also release job opening data for March on Tuesday, and economists are forecasting nearly 8.4 million vacancies, slightly fewer than the previous month. Opportunities continue to decline as employers become more successful in filling positions as the labor market becomes more balanced.
In addition to government data, the Institute for Supply Management will release the results of its May surveys of manufacturers and service providers on Monday and Wednesday, respectively.
Looking north, the Bank of Canada is poised to begin an easing cycle soon. The country has seen four consecutive disinflationary reports, and a report released Friday also showed slower-than-expected economic growth.
Economists and traders widely expect the central bank to cut its key rate by 25 basis points on Wednesday. However, there remains some uncertainty about the reaction of cautious Governor Tiff Macklem and his decision-makers.
With household consumption remaining strong and job gains beating expectations last month, they could wait for more data and launch a round of easing at the July 24 meeting.
Asia
Asia receives a multitude of purchasing managers’ indices on Monday.
China’s Caixin manufacturing PMI is expected to show activity among small and medium-sized businesses continuing to expand, with the indicator expected to edge up in May to mark a seventh month above the boom-or-bust threshold of 50. The service figures also seem to be up slightly.
Indonesia, South Korea, the Philippines, Taiwan and Vietnam get their PMIs on the same day.
Figures released on Wednesday are expected to show Australia’s economy grew slightly in the first quarter from the previous period, which would be the 10th consecutive expansion.
Data on exports and inventories released the day before will provide economists with reference material to refine their estimates of gross domestic product.
In Japan, corporate profit and investment spending figures will give an idea of how first-quarter GDP might be revised.
Headline inflation may have slowed somewhat in Indonesia in May. Statistics on consumer price growth are also expected from South Korea, Thailand, Taiwan and the Philippines.
Real wages in Japan have likely fallen for the 25th month in Japan, a possible topic during Bank of Japan board member Toyoaki Nakamura’s remarks on Thursday.
Elsewhere in central banks, the Reserve Bank of India is expected to keep its benchmark repurchase rate steady at 6.5% for an eighth straight meeting when the policy committee meets on Friday, as warmer-than-usual weather pushes back expectations of a pivot towards rates. cuts.
The week ends with Chinese exports for May.
Europe, Middle East, Africa
While the ECB will take center stage, numerous industrial figures will also be released throughout the week.
Italian and Spanish factory PMIs for May are released on Monday, while production figures for April will be released in France, Spain and Germany respectively from Wednesday – offering clues about the health of the economy early of the second trimester. Orders from German factories and trade statistics are also expected.
On Friday, a wages gauge – a key indicator studied by officials trying to assess inflation risks – will be published by the ECB.
BoE policymakers will stick to a self-imposed period of calm during the ongoing election campaign ahead of the UK’s July 4 general election. Regardless of which political party wins this election, a huge hangover awaits us, severely limiting what the poll-leading Labor Party or the ruling Conservatives can do in office.
As for the south, Turkish officials hope that May inflation data on Monday will mark a peak and that price growth will slow quickly thereafter thanks to aggressive monetary tightening. Analysts polled by Bloomberg anticipate a result of nearly 75% in May, compared to 69.8% a month earlier.
Latin America
Mexico releases monthly and biweekly inflation reports, both currently slightly higher than the central bank’s forecasts. Even if a reduction in interest rates by a quarter of a point at the next Banxico meeting on June 27 remains the consensus, it is not a given.
Chile’s economy accelerated sharply in the first quarter and analysts expect April GDP proxy data released this week to show that the second quarter is also off to a strong start.
On the other hand, consumer prices are expected to rise in the near term, and the May figure released this week likely increased slightly from April’s 4% figure to sit just above the range. tolerance.
Brazil watchers will pay close attention to the central bank’s weekly Market Focus results, which over the past month have seen inflation expectations for 2024 to 2026 gradually climb above the 3% target. .
Central bank chief Roberto Campos Neto stressed in May that inflation expectations had risen sharply.
On a more positive note, first-quarter production data for Brazil will almost certainly show Latin America’s largest economy rebounding from stagnation in the second half of 2023.