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- ECB and Fed: Back-to-back rate cuts in September?
ECB and Fed: Back-to-back rate cuts in September?
soft inflation prints for both
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Welcome back to SovereignBeat!
Latest PCE print eases Fed's September decision.
EU inflation dives in August; September rate cut likely!
NVIDIA drops 10%, dragging down Nasdaq but S&P and Dow are up!
Libya shuts down oil exports, but prices still fell for a third week
Ethiopia's push to acquire Somaliland land heightens tensions with Egypt and Somalia.
Let’s dissect
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Markets Snapshot
As of 30/08/2024 market close
Macro and Fixed Income Markets
US: The Fed's preferred inflation gauge, core personal consumption expenditures published by The Bureau of Economic Analysis, rose 0.2% in July and 2.6% year-over-year, slightly below the initial 2.7% estimate. All-item inflation hit the forecast at 0.2% monthly and 2.5% annually. The numbers aligned with expectations, offering no surprises but reinforcing that the Fed has room to start cutting rates now. Unless we'll see very weak job openings and unemployment report data by the Bureau of Labor Statistics next week, it is safe to assume 25bps cut on September 18th. The probability of a 25bps rate cut fell from 75% to 70% this week, while a 50bps cut is now priced at 30%, according to futures markets.
GDP data, meanwhile, revealed that the U.S. economy grew at a slightly stronger pace in the second quarter than initially reported by the Bureau of Economic Analysis. Gross domestic product increased at a 3% annualized rate from April to June, up from the previous estimate of 2.8%. The revision was largely due to higher personal spending.
U.S. 10-year Treasury yields rose to over 3.91%, driven by robust PCE and GDP growth data, as well as strong corporate profits, suggesting a more restrictive approach to rate cuts by the Fed than previously envisioned by some and a reallocation of capital to equity markets.
EU: Eurozone headline inflation slowed to 2.2% in August from 2.6% in July, marking the lowest level in three years but still slightly above the ECB’s 2% target. Friday’s preliminary figure was in line with a forecast of 2.2 per cent in a Reuters poll. The decline was partly due to higher energy costs from a year ago. Core inflation, excluding food and energy, edged down to 2.8% from 2.9%. However, services inflation increased to 4.2% from 4.0%. Nonetheless, this rise can largely be attributed to the Olympics in France, which drove up prices for accommodation and transport, as well as a seasonal increase in European tourist arrivals in July.
Sources: LSEG, FT
Markets are now expecting the ECB to lower its benchmark deposit rate by a quarter of a percentage point to 3.5% at its next meeting on September 12, with around 65 bps of reductions by year-end, driven by signals of potential cuts from the Fed. However, ECB officials, including executive board member Isabel Schnabel and governing council members Robert Holzmann and Joachim Nagel, expressed concerns over persistent underlying inflation pressures. The euro fell to $1.1 from $1.12, retreating from a 13-month high, as favourable inflation data paves the way for rate cuts and lower deposit rate.
Equity Markets
The S&P closed the week up 0.15%, just under 1% shy of its mid-July record high. The Dow gained 0.88%, surpassing its previous record set earlier in the week. The tech-heavy Nasdaq Composite declined by 0.86% wow, pulled down by chip giant NVIDIA, which dropped nearly 10%—wiping out about $300 billion in value at its low on Thursday—after the company reported earnings that fell short of the most optimistic forecasts.
Commodity Markets
Oil: Libya's eastern government announced a shutdown of crude production and exports, escalating a dispute with its Tripoli-based rival over control of the central bank and oil revenues. The decision led to a force majeure on all oil fields, terminals, and facilities, causing Brent crude prices to surge by 3.2% mid-week. Over a decade after the death of Muammar Gaddafi, Libya remains split between the west (Dbeibeh, Qatar, Turkey) and the east (Haftar, UAE, Egypt, France, Russia) of the country and that split is again widening.
Libya's latest oil blockade could disrupt crude exports to Europe, its largest market, pushing European refineries to seek alternatives. Italy, Germany, and Spain were the main destinations for Libya's exports. In Asia, China received about 25% of Libya's oil exports in 2020, according to the EIA.
Despite the Libyan export shutdown, OPEC+’s plan to taper production cuts drove oil prices down this week, resulting in a 2.4% drop in Brent crude. Six OPEC+ sources told Reuters that the group still plans to boost production in October. This move comes as Libyan output loss tightens the market and OPEC hopes that the Fed's interest rate cuts will boost economic growth and demand for oil.
Goldman Sachs and Morgan Stanley have revised their Brent crude price outlook for 2025, now estimating an average below USD 80 per barrel. This revision reflects anticipated growth in global supply and possible production hikes from OPEC+. With the concerns over weakening demand in China and OPEC’s anticipated easing of production output restrictions, both banks foresee market surplus next year.
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Global Finance
Rising Tensions in the Horn of Africa
Egypt has escalated tensions in the Horn of Africa by started supplying arms to Somalia and offering military training. Earlier this month, Cairo and Mogadishu signed a security agreement during Somali President Hassan Sheikh Mohamud's visit to Egypt, where he met with President Abdel-Fattah el-Sisi. Although details of the deal are confidential, Somali Ambassador to Cairo confirmed that the arrival of Egyptian military equipment this week marks “the first practical step” in implementing the agreement. He also indicated that Egyptian troops are expected to be deployed to Somalia after December 31, when the African Union’s peacekeeping mission concludes.
This development follows a January memorandum of understanding between landlocked Ethiopia and the breakaway Somali region of Somaliland. Under the deal, Somaliland agreed to lease a 20-km stretch of its coastline to Ethiopia for a marine base, while Ethiopia would recognize Somaliland's sovereignty in exchange. Despite this, Somaliland, which seceded from Somalia over 30 years ago, is not recognized as an independent state by the African Union or the United Nations, and Somalia still claims it as part of its territory. While Ethiopia, with a population exceeding 120 million, is the world’s most populous landlocked country.
Egypt is in conflict with Ethiopia not only because of Addis Ababa's expanding ambitions, which poses risks to regional stability and status quo, but also due to the construction of a $4 billion dam on the Blue Nile, a crucial tributary of the Nile River. Egypt fears the dam could drastically affect its downstream water and irrigation supplies unless Ethiopia addresses these concerns. Ethiopia, in turn, is focused on using the dam to produce essential electricity.
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