Europe turns to ECB after US inflation selloff
Currency bloc is now in its sixth straight quarter of economic stagnation
Stocks and the euro were steady ahead of the European Central Bank meeting on Thursday, after stubborn U.S. inflation numbers triggered the biggest global market selloff in months and left Japan’s yen at a new 34-year low.
Euro traders were feeling especially fragile after Wednesday’s surprise U.S. CPI figures sent the dollar on its biggest tear in over a year against the single currency by quashing hopes of near-term Fed rate cut.
Europe’s bourses had opened broadly flat in line with MSCI’s main global index, with focus on whether ECB chief Christine Lagarde bolsters expectations later that it will start cutting rates in June, thereby opening up a serious wedge with the Fed.
Bond markets were still reeling, meanwhile, after the 10-year U.S. Treasury yield - the main driver of global borrowing costs - had shot back above 4.5 per cent, its biggest daily leap since September 2022.
Germany’s 10-year bond yield - the European benchmark - was up fractionally at 2.45 per cent, after rising 6 bps on Wednesday although that was a small change compared to the 18 bps jump experienced by Treasury traders.
“The key driver now remains U.S. rates,” Amundi’s Co-Head of Emerging Markets/Fixed Income Sergei Strigo said, pointing to Treasuries braking up through the 4.5 per cent level again. “The question is whether we are going to stick to these levels or are going to go higher”.
For ECB watchers, the bank has kept rates steady since September but has already signalled that cuts are coming into view, with policymakers awaiting a few more comforting wage indicators before pulling the trigger.
The currency bloc is now in its sixth straight quarter of economic stagnation and the labour market is starting to soften, an obvious contrast to the U.S. economy which continues to grow robustly.
“While there are limits to how much ECB policy can diverge from the Fed over time, there is nothing to stop the ECB from cutting first or setting its own pace of cuts early on in the easing cycle,” Deutsche Bank’s Jim Reid said.
However, he also pointed to how markets cut the likelihood of an ECB cut by June back to 82 per cent on Wednesday, down from 91 per cent the previous day. Likewise, at the Bank of England, it fell from 74 per cent to 56 per cent, for the Bank of Canada it fell from 78 per cent to 53 per cent, and for the Reserve Bank of Australia it went from 25 per cent to 21 per cent.
Inflation warning
U.S. stock futures were little changed after Wall Street had fallen around 1 per cent. Treasuries also steadied after the surge in yields had pushed them to their highest levels since November.
Overnight in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.3 per cent, paring some earlier losses, while Japan’s Nikkei dropped 0.5 per cent.
It was the beleaguered yen that was the main focus though, after the roaring greenback knocked the Japanese currency to a 34-year low of 153.24 per dollar.
It eased up slightly to 152.90 yen as the risk of government intervention potentially looms large now. Japan’s top currency diplomat, Masato Kanda, warned on Thursday that authorities would not rule out any steps to respond to disorderly exchange-rate moves.
In commodities, metal prices were resilient in the face of a strong dollar while oil held gains after advancing more than 1 per cent following an Israeli strike that killed three sons of a Hamas leader, fuelling worries that ceasefire talks might stall.
Brent rose 0.15 per cent to $90.62 a barrel, and U.S. crude was 0.1 per cent higher at $86.33 per barrel. Gold prices gained 0.3 per cent to $2,338.79 per ounce, charging towards record highs, after losing 0.8 per cent overnight.