Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of Macroeconomic Research
Summary: More than the slowdown in economic activity, which is well-reflected in very weak manufacturing sentiment, current level of inflation (both headline and core inflation) released for the month of July are particularly concerning and add to the case for new ECB action next month.
This is one of the charts that probably scares the ECB the most. More than the slowdown in economic activity, which is well-reflected in very weak manufacturing sentiment, current level of inflation (both headline and core inflation) released for the month of July are particularly concerning and add to the case for new ECB action next month. In his latest press conference, Mario Draghi made many references to “we don’t like it” when talking about the level of inflation.
Weakness of inflation is broad-based, even in Germany where HICP surprised to the downside, at 1.1% YoY in July. What is even more worrying is that PIIGS countries are lurching towards deflation again: Italy’s HICP was out at 0.4% YoY last month, and Spain’s HICP dropped to minus 0.7% YoY, the lowest level since July 2014!
The ECB is going to have to find some way of responding, probably by lowering the deposit rate by 10 basis point and relaunching QE at some point in coming months. However, as lowflation is foremost related to structural factors (we have pointed it out many times: notably ageing, new technology and debt), it is unlikely that a new round of easing will have a positive long-term impact on HICP. The ECB needs to rethink its mandate, which primarily focuses on maintaining price stability, and broaden it to new missions, such as fighting unemployment or financing the green transition. Nothing new, since it has been widely debated among economists and market participants over the past years but, at some point, the ECB will really need to tackle this issue. It is a matter of credibility.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)