Rate cuts begin in Canada and Europe

2024-06-07




Economic insights Market insights
hello welcome to Russell Investments Market week and review for the week ending June 7th 2024 I'm Zoe Warg and I'll be your host today I am joined by Sha chria director of investment strategy hi Shay how are you I'm good how are you Zoe happy to have the Sun out in Seattle that's how I'm doing so a lot of activity this week um starting particularly with central banks what kind of outcomes did we see and how did the markets react yeah for sure it it has been an interesting week and we've actually seen quite a bit of movement in in interest rates once again it's kind of been the theme throughout the year where we've seen Fair bit of Market volatil or interest rate volatility uh I should say and this time around we've seen a downshift in yields this week and part of that is is due to Central Bank activity uh we believe so both the European Central Bank as well as the bank in Canada had interest rate decisions this week and they both cut by 25 basis points now this is the first uh rate cut for both of these central banks in this uh this rate cycle uh if you will the ECB rate now their deposit rate is at 375 3.75% versus the Bank of Canada their policy rate is at 4. 75% now just to keep in mind it's just the initial rate cut so both rates are still very restrictive and you know based on the messaging that both central banks have communicated U and they're both of course messaging data dependency right there isn't a predetermined path uh but crucial will be you know disinflation Trends going forward and and if the disinflation trend does progress as these central banks uh expect then we should see further rate Cuts over the course of this year now the markets are pricing about one to two rate cuts for the European Central Bank for the Bank of Canada the markets are pricing about two rate Cuts uh by the end of this year uh we think that slightly more is possible what than what the markets are pricing but of course a lot of that will be data dependent and of course is influenced by inflation Trends continuing to cooperate as as we expect uh it would all right excellent it feels like every time I'm on this show we are talking about inflation so it's nice to hear that there is some movement after all uh so we've covered Canada and the Europe how about we move over to the US how are the economic data looking right now I know we've got some interesting stuff coming out tomorrow but what are our expectations for sure and you know we talk about interest rates and the down that down shift that we've seen uh so far uh this this week but you know it it is really the US economy its labor market and fed expectations that drive uh it's a key driver for Global rates right and it's been the case so far this year where in the beginning of the year where we had a situation where the US economy um as well as inflation was much stronger than it expected and we saw yields rise over the first call it three to four months of the year but more recently over the last month or so we have seen a bit of a moderation so not a comp collapsing by any means but just a moderation from really strong levels in terms of growth uh in the US and we've seen yields generally been moving lower since call it you know mid to late April as a result of the moderation in in US economic uh grow growth Trends now of course what will be really critical this week is the the non-farm payrolls report and that gets released on Friday we are recording this on Thursday so we don't have that crucial bit of information but what we can do is maybe provide there some broader observations based on the jolts report of the the job openings and labor turnover survey that was released this week for the month of April which gives us a good idea in terms of just assessing overall um Supply and labor um supply and demand uh balance between um uh for the labor market and what we've seen there is one of the key measures that the fed and Market participants have been keeping an eye on is that job openings to unemployed ratio and that ratio at Peak labor market tightness if you will uh back in uh earlier in 2022 it is around two so two openings for one unemployed that's come back uh quite uh dramatically and it's now around 1. 2 and that's roughly where that level was that ratio was uh prior to the pandemic so we've seen a considerable progress in terms of the rebalancing the the of the labor market but what's important to note is that we've seen this level of rebalancing without any job losses which is almost unprecedented so a nice rebalancing of the labor market has occurred um over the last you know many months which has been clearly encouraging for the overall US economy of course uh the Friday non-farm payroll report will be an important data point will which will influence of course the FED Outlook and of course uh contribute to potentially contribute to interest rate volatility uh the consensus is looking for about 185,000 uh job gains and that number is roughly around what we call the replacement rate which would keep the unemployment rate steady now the way we kind of see things is if there is a big upside or downside to that relative to that number that's when we could see the markets move uh uh quite a bit where a significant upside surprise uh to the labor market uh to the job growth numbers that would uh perhaps uh imply that the FED might need to stay maybe restrictive for for a little bit longer uh but of course on the other end if the if the job growth number is much softer than expected then that obviously could imply that the US economy may not be just moderating but perhaps weaker than what the markets are currently expecting and that would of course form corporate corporate profitability as well and could be Market moving so you know those are some of the the things that we're keeping an eye out for for the the labor report absolutely it's all data dependent right Shay thank you as always for giving us these insights without you we would be lost and I certainly would be here hosting this show so thanks to all of you for joining us and thanks Shay for your insights as always please join us again next week for Market weekend review hi I'm Sophie an head of portfolio and business Consulting at Russell Investments if you liked what you just saw and heard consider subscribing to our YouTube channel or check us out on LinkedIn thanks for tuning in

Executive summary:

  • The European Central Bank and the Bank of Canada both lowered borrowing costs by 25 basis points at their June meetings
  • U.S. Treasury yields have declined since late April due to a moderation in economic growth
  • April's JOLTS report shows that considerable progress has been made in the rebalancing of the U.S. labor market.

On the latest edition of Market Week in Review, Director of Investment Strategies, Shailesh Kshatriya, and ESG and Active Ownership Analyst Zoe Warganz discussed the recent rate cuts by the European Central Bank (ECB) and the Bank of Canada (BoC). They also chatted about the downshift in interest rates as well as the latest U.S. JOLTS (Job Openings and Labor Turnover Survey) report.

European Central Bank, Bank of Canada cut rates by 25 bps

Warganz and Kshatriya kicked off by unpacking the decisions of both the ECB and the BoC to lower interest rates for the first time this cycle. Kshatriya said that both central banks cut rates by 25 basis points (bps) at their respective meetings the week of June 3, citing declining inflation as the key factor.

The ECB’s benchmark rate now stands at 3.75%, with the BoC’s at 4.75%, Kshatriya remarked. He stressed that both policy rates still remain very restrictive—and that the 25-bps cuts were only initial cuts. “Following their announcements, both banks emphasized that future decisions on monetary policy will continue to be guided by upcoming data. In other words, there’s no predetermined path to lower rates, with both the ECB and BoC remaining data-dependent,” Kshatriya stated.

That said, he emphasized that if the disinflation trends in Europe and Canada progress as expected, further rate cuts are likely in the second half of the year. Currently, markets are pricing in one or two additional rate cuts in Europe in 2024 and approximately two in Canada, Kshatriya said.

“I’m of the opinion that both the ECB and the BoC could cut rates slightly more than markets expect this year, but this hinges on inflation continuing to ease as 2024 progresses,” he said.

U.S. job openings fall as labor-market rebalancing continues

The conversation shifted to U.S. Treasury yields, with Kshatriya noting that yields have generally moved lower over the past several weeks. Case-in-point: At market close on June 6, the yield on the benchmark 10-year Treasury note was approximately 30 bps lower than in late April, he said.

Kshatriya attributed the key reason for this to the recent moderation in U.S. growth. “In the first three or so months of the year, inflation came in stronger than expected and the labor market proved more resilient than anticipated. Both of these developments pushed up yields,” he explained. Since then, however, U.S. economic growth has largely moderated, Kshatriya noted, with consumer-price gains easing in April and the labor market showing signs of cooling off. In turn, government bond yields have fallen, he remarked.

Kshatriya said that the JOLTS survey for April shows that considerable progress has been made in rebalancing the nation’s labor market, with demand more closely matching supply as the number of available jobs drops. He explained that the ratio of job openings to job seekers has declined dramatically in the past two years, with 1.2 job openings available for every job seeker. In 2022, there were approximately two job openings for every job seeker, he said.

The current ratio of 1.2 to 1 is now back to what it was prior to the COVID-19 pandemic, Kshatriya noted, adding that this rebalancing has been relatively painless. “The rebalancing of the U.S. labor market without significant job losses is almost unprecedented in recent history, and it’s very encouraging for the health of the economy overall,” he stated. Kshatriya concluded by noting he’ll be paying very close attention to upcoming data on jobs and inflation to see if the trend toward moderating U.S. growth continues.

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