ECB moves to cutting cycle, maybe

The European Central Bank cut rates, as expected, and was rather vague about the next steps, also as expected. The seemingly interesting bit was the ECB chose to raise rates despite not only the uptick in the recent inflation data, but also with staff forecasts showing higher inflation. Inflation forecasts raised to 2.5% from 2.3% this year, 2.2% from 2.0% in 2025. We are moving from the point of tacit acceptance of higher inflation to explicit. It’s also true that the rate of inflation has come down a lot – 2.5% or 2.3% is marginal stuff compared to 10% like we saw before. And wages are not rising as fast as feared: they maybe are a bit elevated but forward-looking indicators signal that wage growth will moderate during the year. The ECB did not give much away in terms of the likely future path of monetary policy, it’s wedded firmly to ‘data-dependence’, but it looks as though we could see another two rate cuts this year. The market thinks maybe just the one. The funny thing is that the ECB doesn’t tend to move before the Fed, and it doesn’t tend to start cutting before a recession. Maybe they are, actually, ahead of the curve?

It seemed like the kind of hawkish/patient cut the market had been expecting – EURUSD pushed up to 1.09 and came back off but is rising again this morning. US-German 10yr spreads narrowed further (reconvergence), down below 177bps. 

Which takes us to jobs day in the US. Many economists are worried about the quality of the data. Consensus is for something pretty steady around 180k, average earnings +0.3% and unemployment rate unchanged at 3.9%. If the ECB is likely heading towards 2-3 cuts this year, the case for the Fed to cut in September is building, as I have outlined here all week. The NFP report will provide the narrative driver on this front into the weekend. EU elections could stoke some volatility in the EURUSD cross.

China trade data for May showed strong export growth and slow import growth - exports rose 7.6% against 6.0% expected, imports up 1.8% versus 4.2% expected. This is the kind of thing that gets certain US politicians animated. 

European shares ticked lower in early trade on Friday and are pretty well flat for the week. Wall Street finished flat on Thursday after notching record highs in the prior session – SPX –0.02%, Nasdaq –0.1% and the DJIA +0.2% for reference. Oil prices rallied sharply for a second day and are steady this morning. Gold advanced a bit more with the US 10yr Treasury yield at 4.3% ahead of the payrolls report. 

GameStop shares surged 50% after Roaring Kitty posted on YouTube that he would host a live stream later today. It’s scheduled for 5pm BST. Is this a genuine belief in GME, or just a pump-and-dump? Do you want to be his exit liquidity, or do you trust that he’s going to make a strong fundamental case for the stock?