Rate cut across the pond

It’s hard to see someone else live your dream.

American investors watching the market rally across the Atlantic sparked by the European Central Bank (ECB) cutting rates are left wondering: When will it be our turn?

While US Fed officials seem adamant that keeping rates high for now is the best exit route from sticky inflation, their European counterparts have decided to implement the first rate cut since 2019, while raising their inflation outlook for this year and next.

The ECB announced Thursday it was cutting the central banks’ key rate down from 4%, where it had been since September 2023, to 3.75%. European stocks closed near an all-time high on the news.

The ECB governing council said in a statement that, “It is now appropriate to moderate the degree of monetary policy restriction after nine months of holding rates steady.” Yet they also emphasized that they don't yet know when the next rate cuts will be—so don’t get too excited for another one in July.

The ECB isn’t alone: Sweden and Switzerland’s central banks both announced rate cuts this year already. Canada, too, became the first G7 nation to slash rates on Wednesday.

Is the US next?

After seeing our neighbors to the north and allies across the Atlantic slashing rates, American investors can’t help but wonder if the Fed will take inspiration from its fellow central bankers.

Yet the Fed is paying more attention to domestic macroeconomic data than what other international banks are doing. Investors are more likely to understand the Fed’s next move by paying close attention to the data that is driving inflation stateside, such as labor and consumer indicators, according to analysts.

“If the coming labor market data—including tomorrow's May employment report—is soft, it could hasten the Fed's first rate cut, by putting it in late 2024,” wrote Thierry Wizman, Global FX & Rates Strategist at Macquarie, in an analyst note. “Still, the Fed—unlike the ECB—will be much more responsive to what's happening in CPI and PCE PI inflation, than on the labor market.”

So, keep your eyes peeled for Friday’s jobs data and ongoing macro indicators—or just read what happens in this newsletter.—LB