ECB: A high bar not to cut in June

KEY POINTS
ECB Governing Council (GC) kept all its policy rates unchanged - depo rate remains at 4% as widely expected.
Virtually no new news from the March meeting. Key data, yet to be released, to be incorporated in June forecast update. At the margin, both monetary policy statement and press conference came on the dovish side.
Data-dependent prominence consistent with no commitment beyond June.
After yesterday’s US CPI print, market pricing has now fully converged to our longstanding three rate cuts view starting next June.
Market reaction was very muted.

A decision free meeting as widely expected.

ECB GC decided to leave all its policy rates unchanged, thus keeping its depo rate at 4% for a fifth consecutive meeting. Decision was widely expected across market participants and taken by a large majority as reported by Christine Lagarde during the press conference. Both monetary policy statement and press conference reiterated key messages from the March meeting.

The new news was perhaps a dovish tilt

Buildingon a slightly more dovish monetary policy statement (“moderating wage growth, firms are absorbing part of the rise in labour costs in their profits”), President Lagarde dismissed the recent rebound in energy prices arguing that ECB March inflation trajectory already incorporated a number bumps before reaching the target in mid-2025. Furthermore, services inflation remain high – at 4% for a fifth consecutive month - but she emphasized that “we are not going to wait before everything goes back to 2%”. Finally, she highlighted that a few GC members already felt confident enough to cut interest rates in April - “the direction is rather clear”.

More data needed to ascertain domestic disinflation

President Lagarde reiterated the message from the March meeting that a lot of data will be released before the June meeting. Above and beyond the usual dissection of monthly (services) inflation print, quarterly series such as negotiated wages, labour productivity, and unit profits will be available for Q1. They will be key to check - and incorporated into Eurosystem staff forecast update - whether ECB’s two key assumptions made in March will still be on track: expected pick-up in labour productivity, de facto reducing unit labour costs, and evidence of lower corporate profits absorbing increased labour costs. Despite ECB’s all prominent data dependence, we think significant upside surprise would be required for the ECB not to cut in June in line with our longstanding call.

Uncommitted rate cut path

Both monetary policy statement and press conference were consistent in avoiding making any comments on the future rates path in line with our expectations. After a first 25bps rate cut in June, we continue to expect two more cuts in September and December landing the depo rate at 3.25% by year-end.

The ECB April monetary policy has been uneventful for financial markets 

Both short- and long-term parts of the curve were broadly stable at 2.96% for the 2 year (-2bps) and 2.46% for the 10 years (flat), while EURUSD was also flat at 1.07. We are a bit surprised that June rate cut has not been fully priced (still at 80%) but we believe some investors still are not admitting the ECB can cut before the FED.  By year end, the market still expects 75bps of rate cut in line with our long-standing call.

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.

    Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ

    In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    © AXA Investment Managers 2024. All rights reserved

    Back to top
    Are you a Professional Investor ?

    This website is available in English only and directed at professional, institutional or qualified investors. It is not suitable for retail investors. As such, some of the funds, products and services described on this website are not available for retail investors under the MiFID II (Directive 2014/65/UE). By pressing accept you confirm that you are a professional investor and agree to AXA Investment Managers' Legal Information and Terms of Use.