Markets Weekly podcast – 16 September 2024
ECB rate cut and US inflation
16 September 2024
Join podcast host Julien Lafargue as he discusses falling US inflation, the recent rate cut by the European Central Bank, and the soaring price of gold. He also ponders the upcoming interest rate decisions from the Bank of England, the US Federal Reserve and the Bank of Japan.
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Julien Lafargue: Welcome to a new edition of Barclays Markets Weekly podcast. My name is Julien Lafargue, Chief Market Strategist here at Barclays Private Bank, and I will be your host today.
Last week, equity markets rebounded strongly thanks to supportive inflation data, improved tech sentiment, and the ECB cut. So, let’s analyse all of those.
Starting with the US inflation data. So, US headline inflation fell to 2.5% year over year in August. That was down from 2.9% in July and slightly below the expected 2.6%. In fact, this marks the lowest level of headline inflation in the US since February 2021. However, core inflation which, as you know, excludes volatile food and energy prices held steady at 3.2%.
Now, interestingly, if you listen to Blackstone, one of the world’s largest owners of real estate with obviously unique insight into this topic, or if you use real-time data such as rent prices online, and use this as an input to compute housing costs, instead of the notoriously unrealistic methods used in the CPI, then US inflation is actually running closer to 1.6%, 1.7%. So, in other words, the Fed has no reason really to wait any longer before cutting interest rates.
Now, talking about interest rates, last week the ECB cut interest rates by 25 basis points to 3.5%, as expected. Also, as expected, Christine Lagarde gave no indication around future moves except the fact that the ECB will continue to cut interest rates if the data warrants it.
What’s interesting is that the central bank revised lower by about 0.1 percentage point, its gross projections for 2024, 2025 and 2026. And it did that while upgrading its inflation forecast by the same amount for 2024 and 2025.
So now the ECB sees inflation of 2.3% in 2025 with GDP growth of about 1.3%. And the fact that the ECB cut interest rates despite seeing higher inflation ahead, suggests that the main focus, just like for the Fed, is on growth rather than prices.
Now, the market prices in about 40 basis points of additional cuts this year, which means another cut in either October or December, and a 50% chance or so of another one.
Now, lastly, in China, obviously inflation data surprised the consensus to the downside. We know that the country has been fighting deflation for a while. Headline CPI picked up slightly to 0.6% year over year, but that was mainly due to food inflation. Non-food items showed broad-based moderation and core CPI actually hit a 42-month low.
Trade data was also mixed in China and continues to show that the domestic demand isn’t picking up. And that idea was further reinforced over the weekend as retail sales in China missed expectations in August climbing just 2.1% year over year. The consensus was hoping for 2.5%.
Now, I also wanted to mention quickly gold, which is almost at $2,600 an ounce, an all-time high, and it’s a bit of a perfect storm for the precious metal with bond yields coming down, geopolitical tensions remaining elevated, the dollar weakening and central banks continuing to look for diversification in terms of their reserves.
It might be a good idea for people who are over-exposed to gold to take some profits in the short term, but we continue to view gold as an important building block in multi-asset class portfolios.
Now, looking ahead, a pretty busy week with three central bank meetings, the Fed, the BoE and the BoJ in Japan.
Starting with the BoJ, nothing really to see here. We expect the wait and see mode from the Bank of Japan probably until December or January when the BoJ, unlike any other major central bank, should be hiking interest rates.
Somewhat of a similar story with the BoE. We do expect the MPC to maintain the bank rate at 5% as, although inflation is moving in the right direction, progress has been somewhat slow. Last week, in fact, regular private sector wage growth softened to 4.9% year over year in the three months to July. That was down from 5.3% in June. But 5% ish remains significantly above what the BoE would like to see.
The market is pricing in only a 20% chance of a cut. This could go up if the inflation data coming out on Wednesday is much softer than expected. The consensus is looking for a slight tick up in year-over-year core inflation from 3.3% to 3.5%.
Meanwhile, headline prices should be relatively stable at 2.2%. So, bar any surprise there, we would expect a soft signal to a November cut from the BoE, but no clear guidance on the path after that. We believe the bank rate could be cut sequentially in November, December and February, and then in May and August next year by 25 basis points each time to reach around 3.75% by August 2025.
Now, finally, the pièce de résistance for this week, the Fed. Look, with inflation rather muted and the labour market showing signs of cooling, the Fed will almost surely cut interest rates by at least 25 basis points this week. The market is broadly 50/50 on a 50 basis point cut, but the key here, whether it’s 25 basis points or 50 basis points, is the guidance and the update, of course, to the Fed’s projection, the famous ‘dot plot’.
Projections show a total of 75 basis points in cuts this year. We find that relatively sensible. The market is also pricing in about 125 basis points in cuts in 2025, which might be overly optimistic without a more pronounced economic slowdown. So, we’ll see where the Fed stands with regard to both market expectations and our own expectations on Wednesday.
And that’s it for this week. We will be back next week of course but, in the meantime, as always, we wish you all the very best for the trading week ahead.
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