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Weekly Focus – ECB in No Rush to Commit to Further Ccuts

The ECB delivered the widely anticipated first 25bp rate cut but kept its forward-looking guidance vague. Lagarde noted there was a ‘strong likelihood’ the ECB would dial back the restrictiveness of their monetary policy going forward but was not ready to pre-commit or even discuss the possible timing of the next cut. The updated economic projections underscored the cautious tone as both headline and core inflation forecasts were revised higher through 2024-2025. On Friday morning, after the meeting Thursday, several GC members including Nagel, Muller and Kazaks echoed the need to move forward gradually and depending on the incoming data. Markets were ultimately little affected by the meeting, and the next rate cut is still largely priced in by October. We still like our call of ECB cutting rates the next time only in December, read more from our ECB Review – Cutting and keeping, 6 June.

Signs of recovering European manufacturing cycle have helped calm perceived downside risks related to restrictive monetary policy stance. This week’s PMI data showed a particularly sharp improvement in Swedish manufacturers’ order-inventory balances. In contrast to the general trend seen over the past couple of years, US manufacturing data from the ISM was relatively less optimistic and JOLTs job openings pointed towards further cooling in labour demand.

Besides stronger export demand, improving real purchasing power is expected to lift consumption towards summer (and maintain inflation sticky in the process). Lagarde saw growth risks better balanced going forward, which rhymes well with our updated economic projections in the latest Nordic Outlook – Warmer than expected, 4 June. We revised our 2024 growth forecasts slightly higher across the euro area, the US and China. Forecasts for the Nordic economies remained little changed, with Sweden and Denmark still seeing stronger growth already this year while Finland lags behind.

Next week’s main event will be the FOMC meeting on Wednesday where we, broad consensus and markets expect no monetary policy changes. The median rate projection on the updated ‘dot plot’ is likely to shift higher, signalling only two rate cuts this year (instead of three). That said, Powell is likely to still signal bias towards cutting rates going forward and push back on any questions regarding the possibility of further hikes. In the afternoon ahead of the meeting, US May CPI is also due for release. We forecast headline CPI at +0.19% m/m SA (Cons. +0.2%, Apr. +0.31%) and core CPI at +0.25% m/m SA (Cons. +0.3%, Apr. +0.29%). Read more from our Fed preview – No urgency, 7 June.

We expect little to no market reaction to the European Parliament elections this weekend, despite its status as a significant political event. Historical data suggests that these elections typically have a minimal effect on markets, and we anticipate a similar scenario this time, find more details from our earlier preview, Research euro area – European Parliament election will not move markets, 14 May.

Bank of Japan will also wrap up its monetary policy meeting next Friday. We expect no rate changes, but we do expect the BoJ to signal tapering of its bond purchases, which would be a natural next step after BoJ exited its yield curve control policy in March.

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Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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