Morning Bid: ECB to cut, Fed hopes up

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3 days ago

By Mike Dolan
LONDON (Reuters) - What matters in U.S. and global markets today
It was the bond market's turn to rally over the past 24 hours, with a stream of soft U.S. economic readings lifting hopes for Federal Reserve easing just as the European Central Bank is teed up for another rate cut on Thursday.
I'll discuss this and all of the market news below, and then in today's column, I explore Switzerland's deflation dilemma and explain why all investors should care what happens with the Swiss franc.
Today's Market Minute
* U.S. President Donald Trump signed a proclamation on Wednesday banning the citizens of 12 countries from entering the United States, saying the move was needed to protect against "foreign terrorists" and other security threats.
* Hardline conservative Republicans in the U.S. Senate and billionaire Elon Musk showed no sign of softening opposition to President Donald Trump's tax-cut and spending bill on Wednesday, as they pushed for deeper reductions in government outlays.
* The euro steadied near six-week highs against the dollar ahead of an expected interest rate cut from the European Central Bank on Thursday, while the U.S. currency recovered modestly from a dip after data renewed fears of slow growth and high inflation.
* Investors, consumers and policymakers may justifiably fear the specter of tariff-fueled inflation later this year and beyond, but Reuters columnist Jamie McGeever says it's powerful global disinflationary forces that are weighing most heavily right now.
* The Trump administration's latest efforts to curb U.S. petrochemical exports to China could end up hurting the U.S. energy sector just as much, or more, than the Chinese economy, argues Reuters columnist Ron Bousso.
ECB to cut, Fed hopes up
The ECB is widely expected to cut its main interest rate to 2% later today, effectively bringing inflation-adjusted rates back to zero for the first time in almost two years as May headline inflation has already returned to target.
The big question now is whether the ECB will signal that it will pause during the summer while the murky global trade picture clears up - much as the Bank of Canada did on Wednesday.
Aside from questions about ECB boss Christine Lagarde seeing out her full term as president, the focus of the press conference will likely be on possible ECB plans for coping with potentially outsize euro strength ahead. There will also be close attention paid to the ECB's signalling regarding its balance sheet runoff.
European stocks pushed higher on Thursday. The euro held above $1.14 ahead of the ECB decision, after the dollar skidded lower again Wednesday. The move in the greenback was largely driven by a series of weak readings on U.S. private sector jobs and service sector activity for May.
Wall Street stocks ended Wednesday's session unchanged, and futures stalled ahead of today's open.
The latest economic news also dragged 10-year Treasury yields back down to their lowest levels in a month. The futures market is now pricing in some 56 basis points of Fed easing for the rest of the year, with a quarter point cut by September almost fully baked in.
President Donald Trump lost little time before pressuring Fed boss Jerome Powell to lower borrowing costs.
"ADP number out. 'Too Late' Powell must now lower the rate. He is unbelievable. Europe has lowered nine times," Trump said in a Truth Social post, referring to Wednesday's jobs data and - mistakenly - the seven ECB cuts so far in the current cycle.
The tariff picture remained unclear, meanwhile.
There is still no specific date or time set for this week's hotly anticipated call between Trump and China's President Xi Jinping, but Paris talks between U.S. Trade Representative Jamieson Greer and European Union counterpart Maros Sefcovic appeared to go well despite the doubling of steel tariffs this week.
Trump's deadline for countries to present their improved trade negotiations passed without any concrete developments.
Germany's new chancellor Friedrich Merz will hold his first face-to-face talks with Trump on Thursday in a high-stakes meeting in the Oval Office.
Meanwhile, the fate of Trump's 'big, beautiful' fiscal bill in the Senate also remained in the balance.
Hardline conservative Republicans and billionaire Elon Musk stepped up opposition to the tax cut and spending bill on Wednesday, pushing for deeper cuts, with Musk bemoaning "the fast lane to debt slavery."
The nonpartisan Congressional Budget Office estimated the bill - which would extend Trump's 2017 tax cuts and step up spending for the military and border security - will add about $2.4 trillion to the country's $36.2 trillion debt pile.
Elsewhere, MSCI's all-country stock index hovered just below Wednesday's new all-time high, with stocks in China and Europe advancing and South Korea's Kospi index adding another 1% on top of Wednesday's 2% gains after the presidential election there this week.
Japan's Nikkei bucked the trend after another poor government bond auction there, despite reports yesterday that the Bank of Japan may consider slowing its balance sheet rundown.
And now for today's deep dive, I discuss Switzerland's return to deflation due to the supercharged Swiss franc and consider the wider implications for global investors.
Chart of the day
U.S. economic activity has declined and higher tariff rates have put upward pressure on costs and prices in the weeks since Federal Reserve policymakers last met to set interest rates, the Fed's latest "Beige Book" said on Wednesday. "On balance, the outlook remains slightly pessimistic and uncertain", concluded the report. "There were widespread reports of contacts expecting costs and prices to rise at a faster rate going forward."
Today's events to watch
* European Central Bank policy decision (8:15 AM EDT), economic projections and press conference from President Christine Lagarde
* U.S. April international trade balance (8:30 AM EDT), weekly jobless claims (8:30 AM EDT), Q1 revisions on unit labor costs and productivity (1:30 PM EDT); Canada April trade balance (8:30 AM EDT)
* Federal Reserve Board Governor Adriana Kugler, Kansas City Fed President Jeffrey Schmid, Philadelphia Fed chief Patrick Harker all speak. Bank of England policymaker Megan Greene speaks
* German Chancellor Friedrich Merz meets U.S. President Donald Trump in Washington
* U.S. corporate earnings: Broadcom, Lululemon, Brown-Forman
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Mike Dolan; Editing by Anna Szymanski)