Market expectations for rate cuts from the US Federal Reserve and the European Central Bank have changed again. Between Wednesday and Thursday of this week, a new rate cut was erased from the schedule expected by investors for the months to come.and now the roadmap expected by the markets foresees a scenario of 4 reductions of 25 basis points from the Fed until June next year, and 5 reductions of the same caliber from the Bank Central European. What has changed for investors to take this turn? Several macroeconomic data released in recent days in both regions have been surprisingly strong, including inflation and employment data in the United States and the Eurozone. This, in the opinion of investors, is a sign that central banks will not be able to cut rates as quickly as they had planned.
What is happening this month of October on the monetary policy front is reminiscent of what had already been experienced at the start of 2024. At that time, as the year took its first steps, we expected that the economy of the United States and the Eurozone would go through a very difficult year; so much so that the central banks in these two regions would be forced to start cutting rates aggressively from the start of the year, because they would need to stimulate economic growth, and they would not have to worry inflation, because it would be infected. . In the end, this was not the case, and both the United States and Europe experienced stronger economic growth than expected, although on the Old Continent the weakness was more evident than in the northern country. -American.
The current situation has some parallels with what was happening then. Once the ECB, then the Fed, began to lower their rates, in June and September respectively, the markets integrated a scenario of continued decline in the price of silver, which will extend throughout the year next. However, The pace at which money lords are expected to cut rates over this period is slowing, and the change in outlook was particularly strong in October.
At the start of the month, the market anticipated 7 rate cuts of 25 basis points until September 2025 from the US Fed. These prospects have weakened over the days, until we expected 5 rate cuts in the same period, a scenario that continued until this Thursday: a change has occurred again, and the market does not expects more than 4 rate cuts of 25 basis points; The first will take place during the November meeting, according to investors, and the other three between the January and June 2025 meetings.
In the case of the ECB, the change was very similar: if on Wednesday seven rate cuts were expected until September next year, this scenario is now reduced to five cuts. The latest change occurred this week, after investors received third-quarter GDP data from the euro zone and preliminary inflation data for October.
Inflation remains higher than expected
The turnaround in the United States and the euro zone with the prospects of lower interest rates can be explained by the macroeconomic data published this week. At the North American giant, employment data for the month of October released Thursday showed that 233,000 jobs were created during the month, and analysts’ forecasts pointed to a figure half as good: 111 000 hires. The importance of employment is now essential for the Fed, which has publicly acknowledged that it is now the indicator it monitors most in deciding its monetary policy. If employment continues to be strong, the rate cut scenario for the Fed becomes more complicated, since it sees a more dynamic economy than expectedand a fall in the price of silver could push up inflation, the last thing Fed members want to see right now.
Added to this is the GDP deflator published on Thursday (an inflation indicator to which the Fed pays particular attention when analyzing the situation of the American economy), which also exceeded expectations (underlying inflation rose to 2.7%, compared to estimates of 2.6%), was the icing on the cake that investors needed to wipe another rate cut off the map.
Eurozone data helped fuel inflationary pressures. Preliminary GDP data for the third quarter across the Union surprised analysts, with an increase of 0.4% compared to the previous quarter, above estimates which pointed to 0.2%. Furthermore, early inflation data for October was also higher than expected, up to 0.3% month-on-month, compared to an estimate of 0.2%.
