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Fed, ECB see differing paths to rate cuts

Speeches from the leaders of some of the world’s largest central banks on Tuesday painted a picture of diverging monetary policy paths in the US and Europe. While Federal Reserve (Fed) Chair Jerome Powell suggested the central bank may need to keep rates higher for long to achieve its 2% inflation target, European Central Bank (ECB) President Christine Lagarde was more confident about the prospects for interest rate cuts in the euro area. Equity markets were mixed following the central bankers’ statements.

Shane Strowmatt, LGT
Reading time
5 minutes
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Powell said recent inflation data out of the US was not helping policymakers to build confidence that the Fed will reach its 2% target soon. Additionally, the labour market remains strong, he noted. In New York, stock indices couldn’t agree on a clear direction. The Dow Jones Industrial finished Tuesday’s session up 0.2% and the S&P 500 fell 0.2%. The Nasdaq-100 made a marginal gain. Yields on US Treasuries climbed on Tuesday with yields on two-year government debt trading just marginally below 5%, up from about 4.25% to start the year.

In Europe, a different monetary policy narrative emerged with Lagarde noting that if the current disinflationary trend continues, the ECB will need to begin cutting rates soon. A bit of time is still needed for the central bank’s Governing Council members to feel confident in the trend, but inflation is moving in line with expectations, she said. Markets expect the ECB to begin rate cuts in at its next meeting in June. The Euro Stoxx 50 fell 1.4% on Tuesday.

Bank of England (BoE) Governor Andrew Bailey also confirmed UK inflation is moving in the right direction for a rate cut, but the economy is still running near full employment and some time is still needed for interest rates to come down. Data released separately on Tuesday showed the unemployment rate in the UK increased to 4.2% in the three months ending in February, the highest level in half of a year. The dent in the labour market could make it easier for the BoE to begin cutting rates soon.

In individual stocks, Bank of America shares dropped 3.5% after first-quarter fell due to the effects of higher interest rates. Morgan Stanley shares went in the other direction, gaining 2.5%, after the bank posted an increase in first-quarter revenue and profit on the year. Last week, JPMorgan kicked off the earnings season with results below expectations.

In Europe, shares of UBS fell 2.7% on Tuesday following a report from news agency Bloomberg that claimed the Swiss banking giant could need to increase regulatory capital by around USD 20 billion. Last week, the Swiss government revealed a plan for how to regulate the nation’s largest banks that included recommendations such as higher capital requirements and sanctions against bank management. Switzerland’s SMI ended Tuesday’s session 1.8% lower.

In the Asia-Pacific region, stock markets were also mixed on Wednesday. In Tokyo, the Nikkei 225 was trading down 0.8% and in South Korea, the Kospi lost 0.3%. In Australia, the S&P/ASX 200 gained 0.1%. Hong Kong's Hang Seng Index was down 0.6%, while the Shanghai Composite jumped 1.2%.

In macroeconomics, the International Monetary Fund lifted its global economic growth forecast to 3.2% for this year, 0.1% higher than its last estimate in January. It kept its forecast for next year unchanged at 3.2% and noted that inflation and geopolitical risks could slow down growth.

Germany’s ZEW Indicator of Economic Sentiment increased 11.2 points in April to 42.9 points, reaching the highest level in more than two years. Half of the participants in the Mannheim-based Centre for European Economic Research (ZEW) survey expected Europe’s largest economy to pick up over the next six months. The assessment of the current economic situation in Germany remains at a low level, however, increasing 1.3 points to -79.2 points. The German economy has been stuck in a deep slump with gross domestic product (GDP) contracting by 0.1% for the full year 2023. Germany’s DAX was the only major European index to finish Tuesday’s session in positive territory with a gain of 0.1%.

Corporate news in focus: Quarterly figures from Alcoa, ASML, US Bancorp, Volvo.

Economic data in focus: UK Consumer Price Index, UK Producer Price Index, euro area consumer prices, Bank of England Governor Andrew Bailey speaks in Washington, European Central Bank President Christine Lagarde speaks at an event in Washington, US Fed Beige Book.


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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
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