Carmignac: ECB Preview

Carmignac: ECB Preview

9 april 2024

ECB
europese centrale bank (ECB).png

Kevin Thozet, a member of the investment committee at Carmignac, comments on this week's ECB meeting.

April’s ECB meeting will surely be among the swiftest in history. Christine Lagarde was quite clear in March: we can expect one rate cut in June and two to three more later in the year. With just five weeks since the last governing council meeting, hence few extra statistics to ponder, it’s hard to see a data-dependent central bank deviating from course.

The most recent inflation publications did surprise the consensus, with a print 10 basis points below expectations, but these were fully aligned the European Central Bank (ECB)’s forecasts. So, for now, the ECB’s scenario is unfolding as anticipated. With progress being made on the disinflation front, supporting the staff’s forecasts, this week’s discussion should reinforce the case for a June cut, provided data remain aligned.

Several important data points are to be released by the end of May. These include company earnings,  the much anticipated negotiated wages and detailed Q1 GDP data (notably, productivity, profits, unit labour costs). Given the increasing evidence that a manufacturing rebound is at play, there is limited likelihood of downside risk materialising, so the ECB’s message should be 'keep going, there’s nothing to see here'.

Our scenario for the ECB this year is a cut in June, with a possible ‘skip’ in July. Data dependence means that upward inflationary risk should be integrated by the council given that core services inflation remains at 4%, commodities prices are on the upside, and geopolitical risks remain high. Beyond the summer, many things could happen, but the three to four cuts telegraphed by the Frankfurt institution implies back to back cuts from September.

Such an environment provides a favourable backdrop for European credit markets. The resilience of the economy means that default rates should remain in check while disinflation (or the taming of cyclical inflation) means that monetary policy can be more accommodative. We favour short to intermediate maturities. Lower policy rates would be synonymous with reflation, and therefore higher long-term bond yields as the yield curve steepens, reflecting better growth prospects ahead.

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