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.