The European Central Bank (ECB) raised interest rates by 25 basis points again on Thursday in a move widely anticipated by investors. ECB President Christine Lagarde went beyond market expectations, however, saying unlike the US Federal Reserve - which left rates unchanged a day earlier - the ECB has not even begun to discuss pausing its current hiking cycle and another hike in July is very likely.
The ECB lifted its deposit rate to 3.5% on Thursday, the highest level in more than two decades. New economic projections from the ECB suggest that inflation will retreat at a slower pace than previously expected, reaching 2.2% in 2025. Even that rate would still be above the central bank’s target of 2%. The euro area fell into a mild recession to start the year and inflation in the economic bloc is still over 6%. Thursday’s 25-basis-point move was largely anticipated by markets, but the prospects of higher peak rates sent the euro slightly higher and bonds lower immediately after the announcement.
The EuroStoxx 50 closed the day down 0.25%. In individual European stocks, Germany’s Deutsche Bank fell 2.9% after warning that fixed income trading revenue could fall by as much as 20% this quarter.
Also in Europe, data released Thursday suggest Swiss inflation - which is already the lowest among developed countries - will continue to fall this year. The State Secretariat for Economic Affairs now projects inflation at 2.3% in 2023, somewhat lower than its previous forecast of 2.4%. It is also lower than last year’s 2.8%. For 2024, the government agency still expects 1.5% inflation. Supporting the falling inflation thesis on Thursday was Switzerland’s Producer and Import Price Index, which fell by 0.3% in May compared with the previous month. Falling prices for petroleum products and natural gas were the drivers of the lower inflation data. Investors mostly expect the Swiss National Bank to increase rates by 25 basis points next week. The SMI finished Thursday as one of the few European equity indices in positive territory with a 0.22% gain.
In the US, retail sales rose last month, showing the strength of the economy and the battle that US Federal Reserve is facing in reining in inflation. Retail sales gained 0.3% month-on-month in May, following a 0.4% increase in April. Strong retail purchases signal that the economic environment is strong, which could mean inflation needs longer to come down. A day earlier, the Fed released its updated projections which showed slightly higher inflation than in its previous forecast and announced a pause in its rate hiking cycle after 10 consecutive increases. Despite the strong retail sales, cracks are beginning to appear in the strong US labour market with adjusted initial jobless claims remaining at their highest since late 2021 last week at 262,000. A deteriorating labour market could help reduce inflationary pressures.
In New York, the Dow Jones Industrial reversed its losses from the previous day, gaining 1.26% to close at 34,408.06 points Thursday. The S&P 500 finished up 1.22% at 4,425.84 points, and the Nasdaq-100 closed 1.20% higher at 15,185.48 points.
In the Asia-Pacific region, stock markets were also trading higher on Friday after the Bank of Japan maintained its ultra-easy monetary policy, leaving its key interest rate unchanged at -0.1%. The central bank reiterated its stance that inflation will slow late in 2023 and will continue with a 0% cap on 10-year bonds as expected by market participants. In Japan, the Nikkei 225 was trading up 0.4% after the announcement. Hong Kong's Hang Seng Index jumped 0.8%. In mainland China, the Shanghai Composite gained 0.3%, and the Shenzhen Component was 0.6% higher. South Korea’s Kospi was also up 0.4%.
Corporate news in focus: No major corporate news scheduled today.
Economic data in focus: euro area Consumer Price Index (11:00 CET), euro area labour costs (11:00), University of Michigan Index of Consumer Sentiment (16:00).
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.