ECB Minutes in view after wave of hawkish comments

  • European stocks stabilize after yesterday’s decline.AUD fails to react despite concerning Australian job slump.

  • ECB Minutes in view after wave of hawkish comments.

European equity markets have found some degree of stability today, following a FTSE 100 slide that marked its worst session in five months. With UK inflation taking an unwelcome step higher yesterday, we have seen markets reign in expectations over the May rate cut that went from a base case scenario to a coin toss. This represents just one leg of a wider shift in expectations, as rising inflation, improved US retail sales, and hawkish ECB commentary dented hopes of an impending pivot from these major central banks. Yesterday’s 0.6% retail sales bump provides a welcome boost for those hoping to see a strong festive period from the US consumer, with next week’s Visa and American Express set to put more meat on the bone.

Overnight data out of Australia fired a warning shot for the RBA, with the -65.1k employment change figure representing the biggest decline since late 2021. Nonetheless, markets are taking this with a pinch of salt, as AUD gains highlight the feeling that the RBA will only start to consider taking action once they can drive the inflation rate down from the somewhat lofty 4.3% reported last week.

All eyes turn to the ECB meeting minutes, released this afternoon. The common thread seen from recent commentary is to dial down expectations despite the decline in inflation seen in recent months. As we have seen with the recent decline in mortgage rates in the UK, the markets decision to get ahead of the central banks has already led to an easing in financial conditions which could essentially lessen the need to cut interest rates by as much. Nonetheless, eurozone headline inflation looks to be on course to fall below the 2% target by the time we see the March figure stripped out. Therefore, while the ECB may want markets to lower their expectations, the current 71% pricing for a first rate cut in April does look relatively accurate given the expectation of a break below 2% a week prior to the meeting. 

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