European Markets Poised for Increase Ahead of ECB Interest Rate Decision

The European Central Bank is likely to lower interest rates at its meeting on June 6. This was expected as policymakers have been talking about it for a while. The last time rates were cut was in March 2016. The President, Christine Lagarde, said in March that by June, they would have more information to make this decision. The latest projections from March 2024 show that inflation rates are expected to drop to 2% in 2025 and 1.9% in 2026. Core inflation, which excludes energy and food prices, is projected to be at 2.1% for 2025 and 2.0% for 2026. The 25 basis points cut will help keep real interest rates positive, as nominal rates will be higher than the current inflation rate. High borrowing costs have slowed down economic growth in the region, which has reduced demand and helped control price increases. After June, the ECB might continue to lower rates. In May, Eurozone inflation was higher than expected at 2.6%, and core inflation rose to 2.9%. The new economic projections for June could show a slight increase in economic growth and inflation for 2024, while keeping the 2% inflation forecast for 2025 the same. Money markets are predicting that the ECB might cut rates by 43 basis points by September and around 60 by the end of the year. The ECB needs to balance the risks of cutting rates too much or too little. If they cut too much, it could lead to higher inflation before reaching the 2% target. On the other hand, if they don't cut enough, it could slow down economic growth in the eurozone and widen the gap with the United States. The European stock market closed slightly higher, with most sectors doing well. Shares of British pharmaceutical company GSK fell due to news about a trial over its heartburn drug, while British retailer JD Sports saw an increase in shares. The ECB is expected to cut interest rates for the first time since 2019, which is significant as it would be before the U.S. Federal Reserve. Investors are waiting to see if the higher-than-expected Eurozone inflation will change the ECB's plans. Turkey's inflation rose to 75.5% annually in May, with the highest price increases in education, housing, and restaurants. Eurozone manufacturing activity increased in May, with Spain showing the fastest growth in over two years. France and Germany also saw growth, but it was below the expected threshold. There were no major corporate earnings releases on Monday. In Asia-Pacific, stock markets rose due to increased factory activity. China's manufacturing activity grew at its fastest pace in almost two years. U.S. stocks also started the month positively after a strong May. The ECB's decision to cut interest rates for the first time in eight years will be crucial for European markets. Inflation has been below 2% since June 2023, and May's inflation is expected to stay at 1.4% annually. The U.S. jobs data will be closely watched for insights into the country's economic direction. Despite signs of a slowdown, the tight labour market in the U.S. has kept the unemployment rate below 4% since January 2022. Two key data points to watch are the JOLTS Job Openings for March and the non-farm payroll for April. China's trade balance data for May will be important in Asia, following growth in imports and exports in April. Economic growth is expected to remain steady in China, with the Bank of Canada likely to keep its policy rate unchanged at 5% for the seventh time due to cooling inflation.