Mark Jones
LONDON (Reuters) – Reassurances that the European Central Bank still expects to cut interest rates soon helped calm market nerves on Thursday after a panic over U.S. inflation triggered the biggest global sell-off in bonds and stocks in months. left the Japanese yen at a 34-year minimum.
Euro and bond dealers were jittery after surprise US data on Wednesday sparked the dollar’s biggest gap in a year against the single currency, dashing hopes of a near-term Fed rate cut, but they breathed a sigh of relief when the ECB stuck to its guns. [FRX/]
“We depend on data, we do not depend on the Fed,” ECB chief Christine Lagarde said in response to questions after the central bank kept its key interest rate at 4%, where it has been since September.
If inflation continues to approach the ECB’s 2% target in a “sustainable manner”, she added, “it would be appropriate to reduce the current level of monetary policy restrictions.”
European bourses, which fell in line with MSCI’s main global index in morning trade, rose slightly as Lagarde laid out her plans, although an early rally on Wall Street also appeared to lift sentiment.
However, bond markets are still struggling after the index – a key driver of global borrowing costs – rose above 4.5% on Wednesday, its biggest daily jump since September 2022. [/US]
Early on, the US yield stood at 4.57%, while Germany’s 10-year yield (the European benchmark) fell marginally to 2.42% after rising 6 bps. on Wednesday, although that was a small change from the 18 bps jump that the Treasury experienced. traders.
“The key driver now remains US rates,” said Sergei Strigo, co-head of emerging markets and bonds at Amundi, pointing to Treasuries once again breaking above the 4.5% level.
“The question is whether we stick to these levels or go higher.”
For ECB watchers, the bank has now kept its rates steady since September, and policymakers are apparently waiting for a few more reassuring wage figures before pulling the trigger.
The currency bloc is now experiencing a sixth straight quarter of economic stagnation and the labor market is beginning to soften, an obvious contrast to the US economy, which continues to grow strongly.
“While there are limits to how much ECB policy can deviate from Fed policy over time, there is nothing stopping the ECB from cutting rates first or setting its own pace of cuts early in the easing cycle,” said Jim Reed of Deutsche Bank.
However, he also noted that markets have reduced the likelihood of an ECB rate cut by June after shocking US data. After Lagarde answered questions, the figure was around 80%, down from 91% on Tuesday but also up from 75% before the ECB news conference.
Similarly, for the Bank of England it fell from 74% to 56% on Wednesday, Reed added, from 78% to 53% for the Bank of Canada, and for the Reserve Bank of Australia it increased from 25% to 21%.
Riksbank deputy governor Per Jansson also added his views, saying the biggest threat to Sweden’s plans to cut rates next month “comes mainly from the delay of other central banks’ rate cut plans.”
INTERVENTION WARNING
U.S. stocks jumped modestly early after Wall Street fell about 1% on Wednesday. Small changes in Treasury yields kept them near their highest level since November. [.N]
Overnight in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.4%, erasing some earlier losses, to fall 0.35%.
However, much of the focus was on the weaker yen after a rising dollar sent the Japanese currency down to a 34-year low of 153.24 per dollar.
The rate fell slightly to 153.05 yen as the risk of government intervention now potentially looms large. Japan’s top currency diplomat Masato Kanda warned on Wednesday that authorities were not ruling out any steps in response to erratic exchange rate fluctuations.
“It is important that exchange rates move steadily to reflect economic fundamentals,” Japanese Prime Minister Fumio Kishida added on Thursday when asked about the yen’s fall.
That may seem like an overreaction to U.S. inflation falling by less than a tenth of a percentage point, but hot news on consumer prices in March has markets cast doubt on a possible U.S. interest rate cut ahead of the November election.
In commodities, metals prices remained resilient in the face of a strong dollar, while oil continued to rise after rising more than 1% following an Israeli strike that killed three sons of a Hamas leader, fueling fears that talks will end fire may stall. [O/R]
fell 0.5% to just above $90 a barrel and slowly eased to $85.70 a barrel. Gold prices rose 0.2% to $2,338.79 an ounce, holding near this week’s record high. [GOL/]