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Eurozone Economy Defies Rate Cut bets as PMIs Signal Resilience
Dateline: January 26, 2024
Market focus is shifting back to economic data, especially the flash PMIs due out of the eurozone today. These indicators are expected to confirm the ongoing, albeit gradual, recovery of the eurozone economy despite recent global uncertainties.
With the European Central Bank (ECB) maintaining its current monetary policy stance, the prospect of a normalization of the yield curve-where the difference between short- and long-term interest rates returns to more typical levels-is gaining traction. This suggests long-end rates could gradually rise as the recovery progresses,alongside increasing fiscal and supply-side pressures,a trend observed in global markets. Dutch pension reforms could also influence the long end of the euro curve, though predicting the precise impact remains challenging.
The ECB’s minutes from its December meeting revealed the Council believes it is in a “good place” regarding monetary policy, keeping interest rates on hold. However, the minutes also highlighted a continuing debate within the Council regarding the balance of risks to the inflation outlook.
Analysts note that the timing of these risks is crucial. In the short term-the coming months and quarters-the risks may still lean toward the ECB potentially cutting rates again, although this isn’t the current base case.Market expectations for rate cuts can shift rapidly, as seen recently when the probability of a cut this year briefly rose to around 20% leading up to a speech in Davos.
Friday’s Economic Calendar
today’s focus is on the eurozone, with the release of the flash PMIs for January. The consensus forecast points to a slight enhancement, although the manufacturing index is still expected to indicate contraction.
In the U.S., the PMIs are less critical for market movements, though an improvement is also anticipated. The University of Michigan will
