Week ahead: ECB rate decision and EU elections take centre stage

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It will be a pivotal week for European markets as the ECB may cut interest rates for the first time in eight years. The EU elections on 6 June will also shape the regional political landscape. Additionally, the US will release its May employment data, a crucial indicator for the Federal Reserve’s upcoming rate decision. 

Europe

The ECB is widely expected to initiate a quarter-percentage-point rate cut, bringing the main refinancing rate to 4.25% on Friday. Inflation in the euro area has followed a sustained disinflationary trend. May’s headline CPI is anticipated to reach 2.6%, marking the eighth consecutive month below 3%, albeit slightly higher than the estimated 2.5%. The central bank has signaled a readiness to ease monetary policy if inflation continues to trend towards the target level consistently. ECB governing council member Olli Rehn noted a sustained cooling of inflation in the euro area, indicating June as an opportune time for a rate cut. 

The EU Parliamentary elections are scheduled from 6 June to 9 June, involving nearly 450 million EU citizens. Current opinion polls from Euronews suggest that incumbent EU President Ursula von der Leyen is poised to secure another five-year term. However, a surge in right-wing public support could pose a challenge to the predicted outcome. The increasing influence of the radical right has the potential to impact key policies such as the Green Deal, immigration legislation, and the EU budget. 

These two pivotal events have the potential to weaken the euro amidst economic and political uncertainties. While the ECB is expected to commence interest rate cuts sooner than the US Fed, this could exert downward pressure on the euro’s exchange rate against the USD. Additionally, European stock markets may continue to retract as investors exercise caution in response to these developments. 

Furthermore, Switzerland is set to unveil the Consumer Price Index (CPI) for May. Inflation in the country has remained below 2% since June 2023. In April, the annual CPI rose to 1.4% from 1% in March, marking the highest level since December 2023. The May inflation is expected to remain at 1.4% yearly. The Swiss National Bank reduced the interest rate by 25 basis points to 1.5% in March due to inflation levels falling below the targeted range. 

The US

The markets will closely scrutinise the US jobs data for insights into the country’s economic trajectory. Despite indications of a slowdown, the April data suggested that labour markets in the US remained tight, with the unemployment rate staying below 4% since January 2022. 

Two key data points will be in the spotlight: the JOLTS Job Openings for March and the non-farm payroll for April. The JOLTS data serves as a measure of labour demand, revealing all positions that were open on the last business day of the month. On the other hand, the non-farm payroll data provides a gauge of employment change for the month, offering more up-to-date insights into the labour market. 

In March, job openings in the US fell by 325,000 to 8.488 million, marking the lowest level since February 2021, according to the Labour Department’s Bureau of Labour Statistics. Meanwhile, new jobs added totalled 175,000 in April, the lowest since October 2023, and the unemployment rate climbed to 3.9% from 3.8% in the prior month. These recent data points indicate a potential slowdown in the country’s employment growth.

The consensus suggests that the US would add 185,000 new jobs, with the unemployment rate remaining at 3.9% in May. A loosening labour market is seen as good news for the stock markets, as it is an encouraging signal for inflation. This could reinforce the probability that the Fed will conduct a rate cut soon.

Asia Pacific

China’s trade balance data for May takes centre stage in Asia this week. China’s trade data returned to growth in April, with imports up by 8.4% and exports by 1.5%, indicating a rebound in the economic recovery of the world’s second-largest economy in recent months. Recent data reveals that China imported more from the EU, up by nearly 2.5% from a year ago, while exports fell by 3.5%. Positive Chinese economic data typically bodes well for global markets, particularly for European luxury consumer stocks. 

Australia will release its first-quarter GDP, which could influence regional stock markets. Economic growth is expected to remain at the same pace of 0.2% from the last quarter, compared to 0.3% and 0.5% in the second and third quarters of 2023. Despite the slowdown in economic growth, the Reserve Bank of Australia remained hawkish, given signs of inflation resurgence in the country.

Canada

The Bank of Canada (BOC) will also decide on the interest rate this week. The bank is expected to keep the policy rate unchanged at 5% for the seventh consecutive time. Inflation in the country has been cooling, with the April CPI easing to 2.7% from 2.9% in March. However, this level remains above the BOC’s targeted 2%