The Week Ahead on the Markets as the ECB prepares for its rate decision

The European stock markets saw a decline for the week following a five-month gain, potentially due to profit-taking amid uncertainty surrounding central bank policies. With crude oil prices climbing to a six-month high amid the ongoing Middle East tension, global inflation may face a risk of re-elevating, which could defer central banks’ decisions on rate cuts.

This week, the upcoming ECB policy meeting will provide insights into the bank’s policy path and the economic outlook for the Eurozone. Additionally, the US is set to release the March Consumer Price Index (CPI), which will be crucial for the global market’s sentiment. The Bank of New Zealand(RBNZ) and the Bank of Canada (BOC) are also scheduled to decide on their interest rates.

Europe

The Eurozone’s inflation has been trending down, with its March estimated CPI cooling more than expected to 2.4%, making the lowest increase since November 2023. Given that this figure remains above the ECB’s target of 2%, it is likely that the ECB will maintain its policy rates unchanged. The ECB has held the main financing rate at an all-time high of 4.5% and the deposit rate at 4% for four consecutive times since October 2023. Despite the retreat in inflation, wage growth and increases in service prices remain areas of concern for the central bank.

Nonetheless, the ECB is widely expected to commence cutting interest rates in June amid easing inflationary pressure in major economies. The CPI for Germany, France, and Italy, all cooled more than expected in March, printing at 2.3%, 2.3%, and 1.8% from a year ago respectively. In the meantime, Spain’s inflation remained sticky at 3.2% year over year, attributed to an increase in electricity and fuel prices. Most countries’ core inflation, excluding food and energy, also stayed elevated due to high shelter and energy prices.

While the inflation trajectory painted a mixed picture across the 20 member nations, any rhetoric from the bank that is more dovish than expected could be interpreted as a positive signal for market bulls, and conversely, more hawkish rhetoric could have the opposite impact.

In the UK, the focus of the country will be its monthly GDP for February after the country entered a technical recession in the final quarter of 2023. On a positive note, the economy expanded by 0.2% monthly in January, coupled with an accelerating manufacturing PMI for March, indicating that the UK’s economy may be on the way to recovery.

The US

Wall Street was hit by a surge in government bond yields on Thursday last week as the strong US economic data dimmed hopes for a June rate cut by the Fed. Despite a rebound on Friday, the Dow Jones Industrial Average posted the worst week this year. The crucial economic data to watch will be the country’s Consumer Price Index (CPI) for March, as this figure will determine the timing for the central bank to begin cutting interest rates. Fed Chair Jerome Powell indicated that the Fed intends to lower interest rates “at some point this year,” but this action will only occur once the board is confident that inflation is moving sustainably towards 2%. The US headline CPI stood at 3.2% in February after spiking to 3.4% in December. On a positive note, the core CPI has been consistently retracing, reaching 3.8% annually. Consensus calls for a sticker headline inflation of 3.4% for March. A CPI figure higher than expected is likely to prolong the correction phase in the US stock markets. Conversely, a deeper drop in inflation could bolster bullish sentiment once again.

Additionally, this week, the Federal Reserve will release its meeting minutes summarising the discussions and decisions made by committee members in March, during which the dot plot projected three rate cuts for the year. However, recent positive economic data may diminish the likelihood of such progress. Therefore, investors are closely scrutinising the minutes in search of policy clues.

Canada

The Canadian benchmark index, the TSX, mirrored global trends, nearing its all-time high-level last week. The Bank of Canada’s (BOC) rate decision will be in the spotlight for local markets this week. The bank maintained its overnight borrowing rate unchanged for the fifth consecutive time in March, as annual inflation cooled to 2.8% in February from a peak of 8.1% in June 2022. However, the bank indicated that it is not in a hurry to lower the interest rate, citing wage growth and shelter prices continuing to exert upward pressure on inflation. The bank is widely expected to keep the interest rate on hold at 5% for another time this week.

Asia-Pacific Region

The focus of Asian markets will be on a slew of Chinese economic data releases for March, including the new yuan loan, the Consumer Price Index (CPI), the Producer Price Index (PPI), and the trade balance. China’s economy exhibited positive signs in the first quarter, thanks to stimulus measures implemented by the Chinese government, despite ongoing challenges in its housing market. Further improvements in these figures may bolster Chinese stock markets, as regional equities have shown signs of bottoming out since late January.

Another influential event will be the RBNZ’s decision on the cash rate this week. The central bank will most likely keep the Official Cash Rate (OCR) at 5.5% unchanged for the sixth straight time, as the economy fell into a technical recession in the final quarter of 2023.