Rate Cuts Begin: Bank of Canada Leads, Europe Follows, Will the US Be Next?
It is noteworthy that despite the Bank of Canada “jumping the gun” on rate cuts, its inflation level remains above the 2% target. Similarly, the Eurozone’s current inflation rate is also above 2%.
Does this mean that the 2% inflation target is no longer important?
Combining inflation data with the latest statements from central banks, it is evident that the decision to cut rates is driven by a significant downward trend in inflation.
Data shows that Canada’s inflation rate is currently 2.7%, continuing to decline from December last year to April this year.
The Bank of Canada also stated in its announcement: “Three-month core inflation measures indicate that CPI continues to trend downward… With evidence showing that underlying inflation is easing, the Governing Council agreed that monetary policy no longer needs to be as restrictive and lowered the policy rate by 25 basis points.”
Meanwhile, the European Central Bank emphasized that it does not pre-commit to any specific rate path, leaving more flexibility for future monetary policy.
From the statements of these central banks, it is clear that the rate cuts are backed by a significant decline in inflation rates. Canada’s inflation rate has fallen from its high to 2.7%, while the Eurozone’s inflation rate has dropped from over 10% at the end of 2022 to just above 2%.
The market has also responded accordingly, with the latest 10-year government bond yields falling to around 4.3%, the lowest level in the past two months.
Positive ADP Report, Rate Cuts May Come Sooner?
At the same time, the labor market has also brought positive news. In May, ADP reported an increase of only 152,000 jobs, lower than the expected 175,000, indicating further cooling in the labor market.
The reduction in manufacturing jobs is particularly notable, with a decrease of 20,000 jobs in May, continuing a year-and-a-half-long shrinking trend. Despite this, job growth in the service sector remains strong, especially in trade, transportation, and utilities.
Regarding rate cut expectations, the market now sees a nearly 70% chance of the Federal Reserve cutting rates by 25 basis points in September.
Next Week’s Data is Crucial
Additionally, the market is eagerly awaiting this Friday’s non-farm payroll data and next week’s CPI data along with the interest rate decision.
If employment and CPI data continue to show positive signs, it could make a rate cut in September or even July more likely.
Some institutions predict that the nominal CPI for May in the US might increase by 0.07% month-on-month, while core CPI might rise by 0.27% month-on-month, both indicating easing inflationary pressures.
A significant drop in previously high rental inflation could be a major factor in easing overall inflation.
If CPI data meets or falls below expectations, it would provide the Federal Reserve with more room to cut rates to stimulate economic growth.
Post time: Jun-13-2024