ECB’s Rate Cut Delay: A Blow to European Stocks and Bonds Amid Economic Uncertainty
European stocks and bonds experienced a downturn as officials from the European Central Bank (ECB) indicated that the market’s expectations for quick rate cuts may be premature. This news comes despite recent data revealing economic growth challenges and dwindling corporate profits in Germany, Europe’s largest economy.
The Stoxx Europe 600 index fell by 0.5% at closing, marking a sluggish start to the year. The consumer goods and retail sectors were hit hardest, following data showing Germany’s economy had shrunk for the first time since the pandemic last year. Meanwhile, Germany’s 10-year yield rose approximately five basis points to reach a one-month high.
Robert Holzmann, a member of the ECB’s Governing Council, suggested that persistent inflation and geopolitical risks would likely deter the ECB from reducing interest rates this year. He was joined in this sentiment by several colleagues, including ECB President Christine Lagarde, Governing Council member Constantinos Herodotu, and Chief Economist Philip Lane, who warned that it was too early to discuss lowering borrowing costs.
Despite traders betting on six quarter-point cuts from the ECB starting in April, economists predict the first of these four moves won’t occur until June. These predictions are backed by signs of economic weakness in the region, with Germany reporting a contraction of 0.3% in Q4 and a similar decline in output for all of 2023.
However, Bundesbank President Joachim Nagel concurred that it was premature to discuss monetary easing, suggesting no action before summer. Benoit Péloille, chief investment officer at Natixis Wealth Management, noted, “We’re now getting at the stage when bad economic news no longer translates into good news for equity markets.” He added that the US market’s pricing for as many as six quarter-point rate cuts could be overambitious, warning that poor economic news could start to negatively impact the market.
In stock market movements, Dassault Aviation SA saw a significant drop after the French aircraft manufacturer reported a decrease in 2023 jet orders. Similarly, Delivery Hero SE and Just Eat Takeaway.com NV stocks fell following recommendations from BNP Paribas Exane analysts to avoid Europe’s food delivery sector. Volvo Car AB’s shares continued to drop after announcing temporary production halts due to shipping delays caused by Red Sea attacks.
Oil prices also fell, despite a Houthi attack on a US-owned commercial vessel. Soft fundamentals overshadowed potential risks of a wider conflict and disruption of crude flows from the Middle East. Meanwhile, European natural gas futures hit their lowest since August, highlighting the region’s success in increasing supplies since the 2022 energy crisis.
Investors will be closely watching inflation readings in Germany and the UK this week, alongside speeches from political leaders and officials attending the annual WEF, including Chinese Premier Li Qiang. A speech by Federal Reserve Governor Christopher Waller, following last week’s attempts by officials to temper expectations of an imminent rate cut, will also attract attention.
