Market review

Market review

Weekly review 10 June 2024: Key interest rate finally falls

Last week’s market events were marked in particular by the European Central Bank’s interest rate meeting which announced, in addition to the anticipated key interest rate cut, the euro zone’s economic forecasts for the upcoming years. The equity markets experienced mainly positive performance.

As the markets had already priced in the ECB’s decision to cut its key interest rate by a quarter-point, market reactions were moderate. At the meeting’s press conference, Christine Lagarde, President of the European Central Bank, did not confirm that the decision was the start of a longer rate-cut path, but said that she considered it likely, nevertheless. The markets are pricing in the next rate cut to occur in September.

The ECB slightly raised its GDP growth forecast for this year compared with the figures it published in March. The ECB is now projecting 0.9 per cent growth for the euro zone economy for this year and 1.4 per cent for 2025. At the same time, the inflation forecast for this and next year was raised, which places the decision to cut the key interest rate in a slightly peculiar light. The ECB expects euro zone inflation to fall close to the central bank’s target during next year.

The USA published labour market data showing that it added 272,000 new jobs in May and that average hourly earnings rose four per cent compared to a year earlier. The figures create a headache for the Fed, which is considering easing its monetary policy, because a stronger-than-expected labour market maintains inflationary pressure. That is why, after the release of the figures, interest rates began rising and pushed up the dollar price.

The Fed’s first interest rate cut is currently predicted to take place in November or December, but if the labour markets and economic growth stay strong, the pressure to uphold a tight monetary policy remains.

Positive mood continues on the equity markets

With the exception of Japan, the global equity markets have risen over the past month. Also the long-subdued Helsinki stock exchange has shown improved performance. The emerging markets’ performance has also rallied somewhat, except for China, whose equity market performance has been mainly negative over the past couple of weeks.

PMIs currently indicate improving economic activity across the board. The composite index published by the research company Markit, which takes into account both the production and service sectors, was above 50 in Europe, the United States and China, which indicates confidence in the future outlook.

In fixed income, return expectations remain high on average due to the still-elevated interest rate level.

Overall, the market sentiment is good at the moment and the market mood has remained calm throughout the first half-year. This over-the-top positivity may yet result in challenges for the markets if the mood takes a sudden turn.  

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