As expected, the European Central Bank (ECB) cut its key interest rates for the second time. The markets now believe that the US Fed will start to cut its interest rates this week – but the question is, how much?
Lately, the economic outlook has weakened in the US, and the macroeconomic data also point to this. The labour market figures, for example, have been weaker in recent months.
As a result, interest rates have also shown a downward trend, and consequently the fixed income markets have yielded positive returns. At the moment, fixed income investments are indeed attractive especially thanks to the high interest rate floor and no longer because of their wide spreads.
On the currency markets, the depreciation of the dollar has been levelling off in recent weeks. As the exchange rates stabilise, their volatility has no longer had such a strong influence on the return on dollar-denominated asset classes.
In its last week’s interest rate meeting, the ECB expectedly announced an interest rate cut of a quarter-point. There were no surprises at the meeting, nor did the ECB’s President Christine Lagarde comment on future measures. Instead, she underlined, as usual, that the ECB’s future measures depend on economic data.
In connection with the meeting, the ECB also published its updated forecasts on economic growth and inflation. The ECB decided to lower its economic growth forecast a notch, while adjusting the inflation forecast slightly upwards.
Contrary to the past, the ECB started interest rate cuts before the Fed, and by now, the ECB has cut its key interest rates by two quarter-points. Currently, the market does not consider it likely that the ECB will lower its key interest rate in October. The next rate cut is priced in for December.
The central bank saga will continue this week, with the Fed’s interest rate meeting coming up on Wednesday. The market is currently pricing in the Fed’s first interest rate cut with almost absolute certainty.
The only question is whether the Fed will cut its key interest rate by one or even two quarter-points. One quarter-point cut is considered almost certain, but a cut of two quarter-points all at once would be a positive surprise for the market. In terms of the interest rate meeting, the focus will be on the Fed’s communications – how will the Fed Chair Jerome Powel comment on the economic outlook and inflation expectations?
The summer has come to an end, but the price fluctuation that started in the equity markets in the summer has continued.
At the beginning of August, there was a rapid fall in the equity markets, followed by a speedy recovery. This was not the end of fluctuation in the equity markets, though, since there was another, albeit smaller, dip. Some market areas have recovered from the second dip, others have not.
At the beginning of the year, price fluctuations on the equity market were minor, but this will no longer be the case in the autumn. Price fluctuations seem to be here to stay – at least for now.
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