To what extent does the euro area wage data will it influence the next decisions on rates that will be taken by Christine Lagarde’s ECB?
After the incessant rate increases launched by the European Central Bank in 2022 and 2023 to quell the surge in inflation, the first rate cut signed by Christine Lagarde, expected for the next meeting on June 6, is it really armored?
These are the questions that continue to haunt market operators and ordinary citizens of the euro area, following the publication of the data relating to the trend of wages negotiated in the Eurozone.
It is on the answer to these questions, moreover, that crucial decisions depend, relating to the ideal investment portfolio on which to focus or the decision to maybe buy a property, without being forced to resign yourself to paying more or less expensive installments.
Euro rate outlook: what changes for the ECB after salary data (with Fed grain)
Something from yesterday has in fact changed the outlook on interest rates in the euro area:
the data was a surprise, as the consensus had predicted a slowdown in the wage growth rate during the first quarter of 2024 or at most at the same pace as in the last quarter of 2023: certainly not a strengthening, which instead occurred.
ECB President Christine Lagarde will certainly not have welcomed that number, at a time when it also finds itself with the trouble represented by the Fed. Problems sharpened among other things yesterday by the publication of minutes relating to the latest meeting of the US central bankwhich certified the lack of progress made by US inflation and which, even worse, confirmed that some members of the FOMC would agree to raise rates again.
Wall Street thus found itself cashing in yet another bad blow, witnessing the worst slide of the Dow Jones of 2024.
Returning to the ECB, what will happen at this point to the euro area rates?
ECB rate outlook, Barclays presents the expected cuts for 2024 and 2025
Barclays analysts have already been busy, producing the outlook on the next moves of the European Central Bank. No change to forecast a rate cut at the upcoming meeting on June 6th.
However, another rate cut at the July meeting is ruled out.
So there won’t be that surprise encore which had been talked about until a few days ago. And not only because of Powell’s Fed which has its hands tied, but also because of the Eurozone wage data which arrived yesterday.
It must be said that some hawks at the ECBeven before the expected verdict, it hadn’t taken him long to dash the hopes of that double gift.
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“We now believe that the Governing Council, dealing with high uncertainty and an economy that is accelerating at a faster pace than anticipated, it will move more gradually, during 2024″, reads Barclays’ comment.
Said this, analysts have certainly not changed their forecasts:
We continue to expect 25 basis point rate cuts at each of the June, September, December meetings, but we no longer expect a cut in July.
The expected cuts from Barclays remain in any case equal to -150 basis points, spread over two years.
Inflation and the ECB: watch out for the year 2026
Mariano Cena of Barclays, specifically, explained the high uncertainty with which the ECB is grappling with “the outlook on inflation, in particular with the trend of negotiated wages, which was stronger than we expected.”
The analyst also referred to the “persistent momentum in services inflation”and to the fact that the euro area economy is recovering “faster than expected”.
It was these factors that led Barclays to think that, at this point, “the majority of members of the (ECB) Governing Council will opt for a more gradual approach to easing” of the currently restrictive monetary policy of the euro area.
And this more gradual approach, according to the expert, should manifest itself “even if the risks on the inflation outlook beyond this year were confirmed to be more symmetrical and even downwards”.
Three more rate cuts are expected at the June, March and June 2025 meetingswith the ECB which according to Barclays will avoid a restrictive policy that is no longer necessary.
The estimates are so of a deposit rate that will be lowered to 2.5%.
“By December” of this year, the ECB should in fact have “a sense of confidence in wage dynamics and in the disinflation process in the services sector that will accelerate the pace of easing”.
A crucial year could be 2026, as the risks on inflation could even be to the downside.
It hasn’t changed its outlook on rates too much either the research division of Goldman Sachs who, in commenting on the wage report released yesterday, reiterated his belief that wage growth in the euro area is in any case destined to “decelerate in the coming quarters”.
Estimates are a slowdown in growth in compensation per employee of 0.8 percentage points, at a growth rate of 3.9% on an annual basis.
“Plus data from France – which in our previous analysis proved to have the best predictive value of the trend in the area – have proven encouraging,” we read in the comment.
Goldman Sachs also recalled that, from the same ECB wage report, it emerged that the European Central Bank’s expectations are for a weakening of wage dynamics in 2024.
A reference was also made to what was said by Joachim Nagel, President of the Bundesbank, German central bank, during an interview.
The exponent known for his hawkish positions commented strong nominal wage growth in Germany, stating that he had not identified any signs of a “wage-price spiral”. Words which, in fact, should calm the doves, given that they were uttered by an exponent who has often highlighted himself with rather hawkish statements.
eToro on the ECB: also watch out for signs of recovery in the euro economy
A comment on the ECB also came from Gabriel Debach, market analyst at eToro, which also summarized the PMI indices that were released yesterday in the Eurozone:
“The euro area recorded an increase in the PMI index, with data slightly above expectations, reaching 52.3 in May. The services PMI remained stable at 53.3, while the manufacturing PMI increased more than expected to 47.4 – Debach recalled, adding that, “with the composite PMI above 50 for three consecutive monthsthe euro area economy is showing signs of recovery”.
At the same time – the eToro analyst pointed out – “the service sector price index showed a decline in both production costs and inputs, marking the lowest level in the last three years, while remaining above the historical average. A positive sign for the ECB, even if risks persist, given that the employment index continued to grow in May, indicating a recovering economy.”
Debach then focused on the wage data, speaking of a “pressure on wage growth in the euro area” which “accelerated in the first quarter to 4.69% on an annual basis compared to 4.49% in the fourth quarter” and warning that “these data risk generating upward pressure on inflation, especially in the service sector, where wages play a predominant role.”
What are the markets pricing in? ING responds
In this situation still characterized by uncertainty about the direction of inflation in the euro area, a new report signed by ING has taken stock of the situation of the markets’ continued repricing of interest rate expectationsmaking it known that, following the publication of the wage data, the markets are now pricing in rate cuts by the ECB to a lesser extent than what was bet before the release of the report.
To be precise, speculations dropped to just “60 basis points” of scissors, which means, ING pointed out, that the markets now believe two more reductions are likely, during 2024, compared to the three previously priced.
ING said in summary that it does not currently see much support for the possibility that rates will be cut further after the June meeting. Adding that, as a result, it is possible that “short-term rates will continue to rise in the short term”.
The prospect of a rise in Treasury yields was seen as even more likely, given that the dilemma that haunts Jerome Powell’s Fed is more significant than that of the ECBso much so that in the United States there is also talk of the risk that the US central bank will raise rates again.
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