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 divergent policy path from the US.
With a quarter-point reduction all but certain, officials will finally embrace a widening in the difference between borrowing costs on either side of the Atlantic, the implications of which they’ve discussed for months.
ECB policymakers led by President Christine Lagarde have insisted they’re comfortable plowing a separate furrow from the Federal Reserve, even if that risks a weaker currency that could stoke inflation.
How tolerant officials will be is likely to loom large in their debate on further possible easing — even more so after recent reports hinted at lingering consumer-price pressures. Most recently, data on Friday featured an underlying inflation gauge that unexpectedly rose in May for the first time in a year.
The ECB can already see how diverging policy prospects have begun to impact global markets. The euro has fallen to its weakest level against the pound in almost two years on the view that the Bank of England will lag the ECB in lowering rates.
What Bloomberg Economics Says: “Bloomberg Economics forecasts a cut of 25 bps in June, and, after a pause in July, more reductions of the same size in September, October and December.”
Bank of Italy Governor Fabio Panetta acknowledged on Friday that cutting borrowing costs poses a currency risk to prices, but added that tight US policy could also hurt global demand and thereby curb euro-area inflation.
His Austrian colleague Robert Holzmann recently sounded more ominous, acknowledging that “the Fed with the dollar is, figuratively speaking, the 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 press conference. Money markets for now are betting on two reductions in total this year, with a small chance of a third.
Denmark’s central bank is likely to match the ECB move with a quarter-point cut of its own just hours after the euro zone outcome.
Elsewhere, US payrolls and a suspenseful Canadian decision on a possible rate cut will be among highlights in the coming week.
US and Canada
In the wake of fresh US inflation and spending data, the government’s jobs report on Friday is expected to show show steady employment growth again in May. The median forecast in a Bloomberg survey calls for a 190,000 increase, a modest acceleration from the prior month.
That would produce a cooling in average job growth over the most recent three months, adding to evidence that labor demand is softening. The unemployment rate, based on a separate survey of households, is projected to hold at 3.9%.
Average hourly earnings are seen rising 3.9% from May of 2023, matching the prior month’s annual gain. While earnings growth is holding at a three-year low, worker pay gains remain stronger than before the pandemic.
The Labor Department will also issue March job openings data on Tuesday, and economists project nearly 8.4 million vacancies — slightly lower than the prior month. Openings continue to ease as employers have greater success filling positions as the job market becomes more balanced.
In addition to government data, the Institute for Supply Management will release results of its May surveys of manufacturers and services providers on Monday and Wednesday, respectively.
Looking north, the Bank of Canada is in a position to soon begin an easing cycle. The country has seen four disinflationary reports in a row, and a report on Friday showed slower-than-expected economic growth as well.
Economists and traders broadly expect the central bank to deliver a 25-basis point cut to its key policy rate on Wednesday. Still, there remains some uncertainty about how a cautious Governor Tiff Macklem and his policymakers will respond.
Given that household consumption remains strong and job gains blew past expectations last month, they may wait for more data and kick off an easing cycle at the July 24 meeting instead.
Asia
Asia gets a slew of purchasing manager indexes on Monday.
China’s Caixin manufacturing PMI is likely to show activity at small- and medium-sized enterprises continuing to hum along, with the gauge forecast to inch higher in May to mark a seventh month above the 50 boom-or-bust threshold. The services reading is also seen edging higher.
Indonesia, South Korea, the Philippines, Taiwan and Vietnam get PMIs the same day.
Figures on Wednesday are expected to show Australia’s economy grew a tad in the first quarter versus the previous period, in what would be the 10th straight expansion.
Exports and inventories data a day earlier will give economists reference material to fine-tune their gross domestic product estimates.
In Japan, corporate profits and capital spending numbers will provide a steer on how first-quarter GDP may be revised.
Headline inflation may have slowed a bit in Indonesia in May. Statistics on consumer-price growth are also due from South Korea, Thailand, Taiwan and the Philippines.
Real wages in Japan probably fell for a 25th month in Japan, a possible topic when Bank of Japan policy board member Toyoaki Nakamura speaks on Thursday.
Elsewhere in central banks, the Reserve Bank of India is expected to hold its benchmark repurchase rate steady at 6.5% for an eighth straight meeting when the policy committee meets on Friday, as hotter-than-usual weather pushes back expectations for a pivot to rate cuts.
The week ends with China’s May exports.
Europe, Middle East, Africa
While the ECB will take center stage, a slew of industrial numbers will also be released throughout the week.
Italian and Spanish factory PMIs for May are released on Monday, while production numbers for April will be published in France, Spain and Germany, respectively, starting on Wednesday — offering clues on the health of the economy at the start of the second quarter. German factory orders and trade statistics are also due.
On Friday, a gauge of wages — a key indicator studied by officials trying to gauge risks to inflation — will be released by the ECB.
BOE policymakers will stick to a self-imposed quiet period with the election campaign under way before the UK’s July 4 general election. Whichever political party wins that ballot, a massive debt hangover is in store, severely limiting what the poll-leading Labour Party or governing Conservatives can do in office.
Turning south, Turkish officials hope that May inflation data on Monday will mark the peak, and that price growth will rapidly decelerate thereafter thanks to aggressive monetary tightening. Analysts surveyed by Bloomberg anticipate an outcome of almost 75% in May, up from 69.8% a month earlier.
Latin America
Mexico posts full-month and bi-weekly inflation reports, both currently running a bit above central bank forecasts. While a quarter-point interest-rate cut at Banxico’s next meeting on June 27 remains the consensus, it’s not a given.
Chile’s economy accelerated sharply in the first quarter and analysts expect April GDP-proxy data out this week to show that the second quarter got off to a strong start as well.
On the other hand, consumer prices are expected to drift higher in the near term, and the May print posted this week likely inched up from April’s 4% reading to just above the tolerance range.
Brazil watchers will pay close attention to the central bank’s weekly Focus market readout, which over the last month has seen inflation expectations for 2024 to 2026 creep progressively higher above the 3% target.
Central bank chief Roberto Campos Neto noted in May that inflation expectations have been rising steeply.
On a more positive note, first-quarter output data for Brazil are all but certain to show Latin America’s biggest economy rebounding after stalling out in the second half of 2023.
