O Canada! You Cut Before the Fed! The ECB’s Priced to Follow, then it all Depends.
Yesterday, the Bank of Canada became the first major G-7 central bank to initiate monetary policy easing, cutting its benchmark overnight rate by 25bps to 4.75%. This anticipated move signalled Canadian policymakers' satisfaction with inflation progress alongside economic growth concerns.
"With further evidence underlying inflation is easing, monetary policy no longer needs to be as restrictive," the central bank’s Governor Tiff Macklem said, adding "It is reasonable to expect further cuts if inflation continues lower."
Today, on the D-Day 80th Anniversary, the ECB is expected to follow suit, with a hawkish cut. Of this move, markets are certain, pricing in a 100.3% (!) chance, at time of writing, up from 99.5% yesterday. The ECB does, however, face inflation headwinds; eurozone price growth accelerated for the first time this year, to 2.6% in May from 2.4% in April. The core reading spiked to 2.9%, from 2.7%.
Despite the uptick, the ECB is widely expected to pursue gradual easing, with most analysts forecasting no more than three 25bp cuts this year. Unusually, this looming rate cut comes amid an improving economy, not a crisis response. ECB policymakers have hinted at a measured approach; President Lagarde's news conference following the rate announcement could provide further guidance.
As its peers embark on easing, focus turns to the US Fed's path. While some Fed officials have been suggesting a 2024 pause, traders see a near-60% chance of a September cut, with November fully priced in. Following the recent softer jobs data for May, tomorrow’s US employment dump will give much needed clarity on the state of one side of the Fed’s mandate, with CPI and PPI next week addressing the other.
Back to D-Day. June 6, 1944, marked a pivotal moment in WWII when over 156,000 US, UK, Canadian, and Allied troops launched Operation Overlord - history's largest seaborne invasion - on Normandy's beaches to breach Nazi defences and liberate Western Europe. Despite fierce resistance, the successful beachhead paved the way for Nazi Germany's eventual defeat. Today we honour those brave troops, whose courage and sacrifice forever altered the course of history, ensuring the triumph of freedom and democracy.
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