The European Central Bank is universally expected to cut interest rates for the Euro area this week.
Cutting back on interest rates for the first time in two decades can be seen as a positive sign for the dwindling European economy, which has been hit by slow growth and poor demographic patterns.
Average inflation in Euro area countries has been mostly on a downward trend since last year, reaching an annual 2.4% in both March and April, down from a peak of 10.6% in October 2022.
The measure, however, is very dynamic within the block, with figures as low as 0.4% for Lithuania and as high as 4.9% in Belgium.
The ECB commenced its latest rate hike cycle in July 2022. Key ECB interest rates, the European counterpart for the federal funds rate, was hiked a total of 10 times and now stands at 4%. The same rate has been kept steady since September of last year.
June's cut will bring the rate down by 25 basis points to a floor of 3.75%.
Yet the steady pace towards the ideal measure of 2% annual inflation might be hitting a roadblock this month, as Eurostat, the block's main statistics office, is estimatfing that May's inflation has gone up to 2.6%, above estimates of 2.5%.
If the measure is confirmed, it won’t interfere with plans to lower interest rates. It might influence a decision by the ECB to pause rates during July and slow the speed of rate cuts down the line.
Bloomberg Economics has forecast a pause in July and further cuts in September, October and December.
What This Means For US
Timing for the EU's latest inflationary cycle is in line with the U.S.'s wave of price increases. Both territories have been subject to the same variables. Energy prices, for example, are affected by the Ukraine/Russia war.
Yet the block's inflation is easing faster than in the U.S.
Yearly U.S. inflation was 3.4% in April, down from 3.5% in March.
On Friday, the Fed's preferred measure for inflation, the Personal Consumption Expenditure, was released for the month of April, showing a steady course, with a 2.7% annual rise as compared to the previous year.
In a Monday interview, Minneapolis Fed President Neel Kashkari advocated for maintaining the current Fed funds rate in the U.S. for a longer period to avoid the risk of jeopardizing U.S. economic prosperity.
The EU's decision will further widen the gap with the cost of borrowing in the U.S., where the federal funds rate now stands at between 5.25% and 5.5%.
Canada is also expected to slash rates this week, in a decision to be confirmed on Wednesday, also widening the gap of borrowing cost across the Northern border, putting further pressure on the Fed to begin slashing rates sooner rather than later.
Canada's annual inflation rate also shows a better trajectory than its American counterpart, having dropped to 2.7% in April, down from 2.9% in March.
An upcoming jobs report this Friday will further inform the Fed in its upcoming decisions. Economists are estimating the creation of 190,000 jobs in May.
Stocks And Other Assets To Watch
Fixed-income securities like government bonds tend to go up as interest rates are slashed.
Their prices will likely be affected by expectations around upcoming rate cuts in the U.S.
Last week, Bank of America chief investment strategist Michael Hartnett said he's bullish on bonds for the second half of the year as expectations on rate cuts grow and may even become realized.
He said to "buy any dip in bond prices," while recommending to "sell the first cut" for stocks.
While there are many ways to buy government bonds, investors can also access the bond market by purchasing bond ETFs like iShares Core US Aggregate Bond ETF AGG and Vanguard Total Bond Market Index Fund ETF BND.
Real Estate
The real estate market has been one of the worst hit by the recent wave of rate increases, as the cost of borrowing for both commercial and personal building and renovation has skyrocketed.
Expectations on rate cuts could turn out to be a lifeline for the sector, which is covered by ETFs like Vanguard Real Estate Index Fund ETF VNQ, Schwab US REIT ETF SCHH and Real Estate Select Sector SPDR Fund XLRE.
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