First monetary policy meeting of the year and first doom and gloom for the ECB. Before the interventions of the Fed and the BoE this week, the European institution therefore kept rates unchanged for the third consecutive meeting, as expected. If the ECB therefore remains in the status quo and stays the course of recent months, we nevertheless feel an ounce of dovish inflection emerging in Christine Lagarde's speech. It is therefore only a matter of months before the first cuts in key rates are made, most likely at the April or June meeting.
In detail, the members of the board of governors consider that the disinflation movement is well underway and that inflationary risks have clearly declined, although there are two points of attention. The first concerns wages, which have become a key indicator for the ECB. If tensions have started to recede, with “a slight slowdown in wage growth”, this progression is still not compatible with the inflation objective of 2%. The result of the spring salary negotiations, known in June, will therefore be decisive. The second point of attention concerns geopolitical risks and firstly the situation in the Red Sea. The death of American soldiers this weekend, with the risk of spread that this creates, does not bring appeasement. The financial markets seem, for the moment, to ignore this risk as evidenced by the lack of reaction of the indices this morning but the threat of a conflagration is real. To summarize, the members of the ECB therefore consider it still premature to talk about a rate cut and are waiting “to be further along in the disinflation process before being able to be sufficiently sure that inflation will really reach” the 2% objective. . So wait and see... Especially since if the euro zone economy is not necessarily in good shape, with stagnation expected for the last quarter of 2023, some "small" signs of improvement are visible from the Christine Lagarde’s own admission. Indeed, the publication of activity indicators for the month of January shows a rebound, above expectations, in the manufacturing sector. It should be noted, however, that the image is not as positive on services. Enough, however, to give the ECB a little time to act.
Time to act, the Fed can boast of having it. American growth for the fourth quarter of 2023 thus came out well above expectations at 3.3% at an annualized rate compared to a forecast of 2%. Considering the restrictive context of monetary policy, the American economy is simply exceptional! The engine of growth, household consumption is more than resilient, with even an acceleration in services. Americans have clearly benefited from the increase in their real wages thanks to the ongoing disinflation movement, with PCE inflation increasing from 2.6% to 1.7% at an annual rate over the quarter. If the Fed will naturally have to follow the fall in inflation by lowering its rates, the solidity of growth also allows it to take its time. A first rate cut in March is therefore no longer relevant for investors, with expectations of a drop now being only 49% compared to 89% (only) a month ago...
