The European Central Bank could open the door to a weaker euro on Thursday as its first interest rate cut of the cycle puts the region on a different policy path from that of the United States.
With a quarter-point cut all but certain, officials will finally accept the widening difference between borrowing costs on both sides of the Atlantic, the implications of which they have been debating for months.
ECB policymakers, led by President Christine Lagarde, insist they are comfortable plowing a furrow separate from the Federal Reserve, even if it risks weakening the currency, which could cause inflation.
How lenient officials are is likely to be crucial in their debate about further possible policy easing – especially after recent reports hinted at continued pressure on consumer prices. Most recently, data on Friday showed that core inflation rose unexpectedly in May for the first time in a year.
The ECB can already see how diverging policy outlooks have begun to impact global markets. The euro fell to its weakest level against the pound in almost two years as the Bank of England falls behind the ECB in rate cuts.
What Bloomberg Economics Says: “Bloomberg Economics forecasts a 25 bps decline. in June, and after a pause in July, an even greater reduction of the same amount in September, October and December.”
Bank of Italy Governor Fabio Panetta admitted on Friday that lower borrowing costs pose a currency risk to prices, but added that tight US policy could also harm global demand and thereby curb inflation in the eurozone.
His Austrian counterpart Robert Holzmann recently sounded more ominous, admitting that “the Fed with the dollar is, figuratively speaking, gorilla in the room“for officials.
Thursday’s decision will include quarterly forecasts that will be scrutinized for hints of future policy intentions, as will Lagarde’s news conference. Money markets are now betting on two cuts this year, with a small chance of a third.
The Central Bank of Denmark is will probably match The ECB cut its rate by a quarter point just hours after the eurozone election results.
Elsewhere, some of the biggest stories in the coming week will be US employment data and Canada’s worrying decision to potentially cut rates.
USA and Canada
Amid fresh US inflation and spending data, Friday’s government jobs report is expected to show robust employment growth in May. The average Bloomberg survey forecast calls for an increase of 190,000, a modest acceleration from the previous month.
This would slow average job growth over the past three months, providing further evidence that labor demand is weakening. The unemployment rate, according to a separate household survey, is forecast at 3.9%.
Average hourly earnings are expected to grow 3.9% from May 2023, matching the previous month’s annual increase. While income growth is holding at a three-year low, worker wage growth remains higher than before the pandemic.
The Labor Department will also release job openings data for March on Tuesday, with economists forecasting nearly 8.4 million job openings, down slightly from the previous month. The number of vacancies continues to decline as employers become more successful at filling vacancies as the labor market becomes more balanced.
In addition to the government data, the Institute for Supply Management will release results from its May surveys of manufacturers and service providers on Monday and Wednesday, respectively.
Looking north, the Bank of Canada may soon begin an easing cycle. The country has had four straight deflation reports, and Friday’s report also showed slower-than-expected economic growth.
Economists and traders generally expect the central bank to cut its key rate by 25 basis points on Wednesday. Still, there remains some uncertainty about how cautious Gov. Tiff Macklem and his policies will respond.
With household consumption remaining strong and job growth beating expectations last month, they may wait for more data and instead begin the easing cycle at the July 24 meeting.
Asia
A slew of Purchasing Managers’ Indexes will be released in Asia on Monday.
China’s Caixin manufacturing PMI is likely to show activity in small and medium enterprises continuing to rise, with the figure forecast to rise slightly in May, marking the seventh month of exceeding the 50-point boom-bust threshold. The service sector indicators are also growing.
Indonesia, South Korea, the Philippines, Taiwan and Vietnam received their PMIs on the same day.
Data on Wednesday is expected to show Australia’s economy grew slightly in the first quarter from the previous period, marking its 10th straight expansion.
Data on exports and inventories a day earlier will provide economists with a reference point to refine estimates of gross domestic product.
In Japan, corporate profits and capital spending will determine how GDP may be revised in the first quarter.
Headline inflation in Indonesia may have slowed slightly in May. Statistics on rising consumer prices will also be released from South Korea, Thailand, Taiwan and the Philippines.
Real wages in Japan are likely to fall for the 25th month in a row. This is a possible topic of speech by Bank of Japan board member Toyoaki Nakamura on Thursday.
Among other central banks, the Reserve Bank of India is expected to keep its benchmark policy rate at 6.5% for the eighth straight meeting when the policy committee meets on Friday as hotter-than-usual weather throws off expectations for a rate turnaround. cuts.
The week ends with May exports from China.
Europe, Middle East, Africa
While the ECB will be in focus, there will also be a host of industrial data released throughout the week.
Manufacturing PMIs for Italy and Spain for May will be released on Monday, while manufacturing figures for April will be released in France, Spain and Germany respectively starting on Wednesday, providing a snapshot of the economy’s health at the start of the second quarter. The publication of statistics on industrial orders in Germany and trade statistics is also expected.
On Friday, the ECB will release wages, a key indicator studied by officials trying to gauge inflation risks.
Bank of England policymakers will adhere to a voluntary campaign quiet period ahead of the UK general election on July 4. Whichever political party wins this vote, massive debt hangover This is expected to severely limit the chances of Labor, which is leading in the polls, or the ruling Conservatives in power.
Turning course south, Turkish officials are hopeful that May inflation data on Monday will mark a peak and that price rises will slow quickly thereafter thanks to aggressive monetary tightening. Analysts polled by Bloomberg expect the May result to be nearly 75%, up from 69.8% a month earlier.
Latin America
Mexico is publishing monthly and bi-weekly inflation reports that are currently slightly above the central bank’s forecasts. While a quarter-point rate cut at Banxico’s next 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 data, due out this week, to show the second quarter is off to a strong start as well.
On the other hand, consumer prices are expected to rise in the near future, with May data released this week likely to rise from April’s 4% to just above the acceptable range.
Brazil watchers will be paying close attention to the central bank’s weekly Focus market data, where inflation expectations for 2024-2026 have gradually risen above the 3% target over the past month.
Central bank governor Roberto Campos Neto noted in May that inflation expectations were rising sharply.
On a more positive note, Brazil’s first-quarter output data will almost certainly show Latin America’s largest economy recovering from stagnation in the second half of 2023.