Markets Update: ECB Lowers Interest Rates by 25 Basis Points

US equities had a mixed performance for the week due to indications of a cooling economy and varying signals within the labour market, writes Ian Slattery.

Ian Slattery, Zurich Investments

US job growth surged in May with nonfarm payrolls rising by 272,000, significantly exceeding market expectations of 185,000. However, the unemployment rate edged up to 4.0% in May, up from 3.9% the previous month. Wage inflation increased to 4.1% year on year, up from 4.0% in April.

The yield on the 10-year US Treasury bond fell to 4.29%, its lowest level in over two months on Thursday but rebounded after the better than-expected nonfarm payrolls.

On Thursday, the European Central Bank (ECB) announced a reduction in interest rates by 25 basis points, a move widely anticipated by market participants. This is the first reduction since 2019, with the deposit facility interest rate now standing at 3.75%, down from 4%, the main refinancing rate at 4.25%, and the marginal lending facility rate at 4.5%.

Following the ECB decision, the Euro strengthened, with the EUR/USD pair rising to 1.089. Eurozone equities dipped slightly following the news, whilst euro area sovereign bond yields increased. ECB President Christine Lagarde emphasised that this reduction does not signify a dialling back phase of interest rates decisions, stressing the need for more data and analysis to determine the future path.

This week, the Bank of Canada (BoC) also cut interest rates for the first time in the cycle, lowering its key interest rate from 5% to 4.75%. Canada’s growth has been sluggish while inflation continues to decrease. Like the ECB, the BoC has highlighted its dependence on data for future decisions.

Equities

Global stocks were up last week by 1.4% in euro terms and 1.0% in local terms. Year-to-date global markets are up by 13.0% in euro terms and by 10.6% in local terms. The US market, the largest in the world, finished at 1.7% in euro terms and 1.3% in local terms.

Fixed Income & FX

The US 10-year yield finished at 4.4% last week. The German equivalent finished at 2.6%. The Irish 10-year bond yield finished at 3.0%. The Euro/US Dollar exchange rate finished at 1.08, whilst Euro/GBP finished at 0.85.

Commodities

Oil finished the week at $76 per barrel and is up 7.7% year-to-date in euro terms. Gold finished the week at $2,294 per troy ounce and is up 13.6% year-to date in euro terms. Copper finished the week at $9,638 per tonne.

The Week Ahead:

Tuesday 11^th June

Chinese CPI figures are released.

Wednesday 12^th June

Federal Reserve interest rate decision.

Thursday 13^th June

US PPI data goes to print.