The European Central Bank (ECB) is poised for a critical meeting this Thursday, where it is widely anticipated to cut interest rates once again. In the midst of global economic uncertainties, the ECB is set to release new long-term forecasts, despite being aware that these projections may soon become obsolete. This meeting occurs as economic indicators across the globe show varying levels of stability and growth challenges.
A significant shift in focus from inflation to growth has been observed in the markets, as highlighted by the movement in Fed funds futures contracts. The contracts now predict a 61 basis point (bp) reduction in Federal Reserve interest rates for the year, a notable increase from the 28 bp projection made slightly over two weeks ago. This shift coincides with the CME FedWatch tool’s indication of a potential rate cut by June.
In the United States, political dynamics have overshadowed economic discussions, particularly concerning inflation. Consumer spending saw a decline of 0.5% over the month, contributing to a concerning first quarter model crash from 2.3% on February 19 to an alarming -1.5%. This downturn was largely driven by a drop in net exports and consumption spending. The Atlanta Federal Reserve has integrated this decline into its latest GDPNow forecast, reflecting the broader economic challenges.
"Uncertainty about potential U.S. tariffs, the identity of the new German government, the fate of Ukraine and a likely new public spending boost to re-arm the continent are all fogging up ECB eyeglasses considerably" – Reuters' Dolan
The Institute for Supply Management (ISM) is set to release February's US Manufacturing Purchasing Managers' Index (PMI) this Monday, providing further insights into the manufacturing sector’s health. Additionally, several final PMI reports from Japan, Australia, the UK, US, and eurozone are expected today, alongside data on US ISM manufacturing and construction spending.
The US faced a growing goods trade deficit with Norway in 2024, reaching $2.0 billion—a staggering 82.2% increase compared to 2023. U.S. goods exports to Norway in 2024 fell by 8.6% to $4.6 billion, while imports from Norway rose by 7.7% to $6.6 billion.
"Further complicating things is the fact that several critical macroeconomic inputs used to assess the ECB's inflation outlook have been swinging back and forth wildly this year" – Reuters' Dolan
In the commodities market, gold prices have remained around the $2,870 region per troy ounce. This stability is attributed to a weakening US Dollar, higher yields, and heightened geopolitical expectations. Meanwhile, European natural gas prices have experienced volatility, initially surging by approximately 30% in mid-January before reversing these gains by mid-February.
"Take European natural gas prices. From the middle of January, they rocketed about 30% higher, only to reverse all that by the middle of last month" – Reuters' Dolan
As the ECB prepares for its meeting, it faces a complex economic landscape with numerous variables influencing its policy decisions. The market's growing emphasis on growth over inflation reflects broader concerns about economic stability and future trajectories.