Thoughts

April 27, 2024 | 08:52

ECB Returns to Data-Watching

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Maybe it is the title but suddenly, I have a vision of President Lagarde, standing on a boat with Governors Nagel, Knot and Holzmann, all whale watching with their binoculars.......

Anyhoo......

What are some of the most stressful occupations out there? Anything in law enforcement, doctors, nurses, paramedics, fire fighters, pilots, airtraffic controllers… economists. Who am I missing?

Oh yes. Central bankers, particularly so these days. It is no longer as simple as “We need to raise rates… inflation is running amok!” or “We need to slash rates… the jobless rate is running amok!” Nothing is really running amok… except maybe this write-up. (All readers should know at this point how much I tend to ramble.) But there is likely plenty of stress felt by those on the FOMC, as it grapples with a still-hot core PCE deflator, and a consumer that keeps spending. And with ongoing signs of economic resilience, and inflation stickiness, along goes the greenback for the ride. And that has implications elsewhere, especially for those who import energy (example: Japan). This is also the case as certain central banks had sketched out rough plans to ease monetary policy... though they may not have pre-committed to a path, the start date was likely formed in their heads.

The ECB is one such central bank. Speculation of when and how often it will ease changed immediately since the math on the Fed’s expected rate cuts changed. We continue to look for two ECB rate cuts, starting in June with a follow-up in September. We are far, far, more comfortable with our call on the upcoming move than September’s. After all, nearly every member of the Governing Council has more or less told markets outright that it will happen in June. The central bank didn’t have enough to work with at the April meeting but will have lots more data by June 6 to make that decision. And, barring an unexpected shock, the cut will likely happen in “reasonably short order”, according to President Lagarde. Even Germany’s Joachim Nagel said that he is “in favour of a rate cut in June” but warned that it would “not necessarily be followed by a series of rate cuts”. Couldn’t agree more, given that all decisions depend a great deal on the data and there will be plenty of that in the coming week. Although the data should help confirm June’s expected cut, they are unlikely to help shape further moves. Real GDP in Germany, France, Italy and the Euro Area is expected to grow (yes, grow) in Q1, but the gains will likely be modest. Besides, the early April composite PMIs have been mixed (France has contracted for nearly a year, Germany expanded for the first time in a year, and the broader Euro Area grew for two months), suggesting that the region is struggling to grow more meaningfully. We will also see the preliminary April inflation reading for the Euro region: headline CPI is expected to hold steady at 2.4% y/y, and the core to slide to 2.7%, both around two-year lows. That would provide the comfort needed to the vast majority of the ECB that it can cut rates at the next meeting.

After that, the vast majority becomes less vast as many are not convinced that borrowing costs need to decline quickly. Although the ECB is not Fed-dependent, the divergence in monetary policy can only go so far, particularly if the euro weakens further on the back of a resilient greenback and pressures inflation. Other areas, such as wage growth and subsequent spending, will influence policymakers’ views. Meantime, a September cut will stay pencilled in.