Aurelia Butler

The ECB cut rates for the second time this year on Thursday but provided little to no guidance on further moves, even as some policymakers privately argued that coming back for another cut in just five weeks was too soon.Markets now see only a 25% chance of a move on Oct. 17, but pricing could shift after the U.S. Federal Reserve’s own policy decision later this week. “A gradual approach to dialling back restrictiveness will be appropriate if the incoming data are in line with the baseline projection,” ECB chief economist Philip Lane said in a speech. “We should retain optionality about the speed of adjustment.”He said the ECB may need to speed up cuts if the economy faltered or disinflation accelerated but the bank would have to slow down in case of surprises going in the other direction.Peter Kazimir, Slovakia’s central bank chief, was however keen on shutting the door on October, arguing that quick cuts were risky and the ECB needed more hard data proving that inflation is indeed coming back to target by the end of 2025.”We will almost surely need to wait until December for a clearer picture before making our next move,” Kazimir, an outspoken conservative, or policy hawk said in a blog post.”I would require a significant shift, a powerful signal, concerning the outlook to consider backing another cut in October,” Kazimir said. “But the fact is that very little new information is in the pipeline.”The key issue is that wage growth remains quick and that is putting pressure on prices in services, a sector where worker pay is the biggest variable in overall costs.Labour costs rose by an annual 4.7% in the second quarter, a slowdown from 5.0% three months earlier, but that is still well above the 3% rate the ECB considers consistent with its target, Eurostat data showed earlier in the day.But wages are just catching up after workers lost a big chunk of their purchasing power to rapid inflation, and there will be a big slowdown in labour cost growth next year, ECB Vice President Luis de Guindos said in Madrid. Like Lane, de Guindos made the case for keeping all options open on interest rates.The policymakers also pointed to inflation volatility, which may present a communications hurdle.Price growth will slow sharply in September, possibly to target or even below, but will accelerate again towards the end of the year. That could make it seem like the inflation target will already have been met by the next policy meeting, but this is part of the “bumpy” nature of inflation and price growth is not likely to be back at 2% on a sustainable basis until late 2025. More

OTTAWA (Reuters) – Despite three interest rate cuts since June, Canadian consumers still appear to be feeling more stressed than their neighbors in the U.S., where the Federal Reserve has yet to start any reductions in borrowing costs.The persistent financial pressure reflects the vagaries of the Canadian mortgage structure, a surge in rents and a heavy debt load carried by many households. All three have crimped disposable incomes. With more mortgage renewals coming up and high population growth to put more upward pressure on rents, analysts and economists say Canadians will feel stressed well into next year and after, keeping economic growth muted.The outlook remains muted even though Canada got a headstart in lowering borrowing costs, becoming the first ecomomic power in June to cut rates in the current cycle. It has followed up with two more cuts, bringing the key policy rate to 4.25%.The Federal Reserve is likely to cut its benchmark rate for the first time next week, with markets now debating whether it will start with a 25 or 50-basis-point reduction. Canada’s inflation-adjusted per person expenditure has fallen by 2% since the peak of 2022 and 1.1% annually in the second quarter, showing that consumers are reeling under the burden.By comparison, inflation-adjusted spending in the U.S. grew 2.7% annually in July and is generally considered to be in line with the pre-pandemic trend.This divergence mainly reflects the differing structure of Canadian and U.S. mortgages.”What you’re seeing in the U.S. is a preponderance of 30-year fixed-rate mortgages,” said Randall Bartlett, senior director of Canadian economics at Desjardins. “It’s very predictable for households,” he said.By contrast, most Canadian mortgages are either variable rate, or adjustable after four or five years. For homeowners with low-interest loans now coming up for renewal, they can expect their payments to jump, even with the Bank of Canada’s current series of cuts. Bank of Canada Governor Tiff Macklem said during a press conference in London last week that consumers had less extra money to spend compared with their American counterparts because Canadians were spending more to service their mortgage.About C$400 billion ($294.55 billion) worth of mortgages are set to renew in 2025, out of which more than two-thirds are four- or five-year contracts. The 2025 figure is more than 30% of the value of mortgages being renewed this year.”It’s a wall of mortgage renewals coming up,” Bartlett said, and added that this would keep many Canadians under stress way into 2025 and 2026. ELEVATED DEBT LEVELSVivek Dehejia, an associate professor of economics at Carleton University, said renters, a category that comprises two out of every five Canadians, were also feeling the strain.Landlords, themselves burdened with high mortgage payments, are raising rents for their tenants, who in turn are taking on more debt to meet other obligations, he said. That cycle is not likely to ease any time soon, he said. On the demand side, an immigrant-led rise in population has put upward pressure on Canadian rents, which rose 8.5% year on year in July.Canada’s household debt levels were already high when interest rates started rising after the pandemic and that has made conditions worse, analysts said. “Canada entered the pandemic with a very elevated level of vulnerability to interest rates,” said Karl Schamotta, chief market strategist at Corpay, an global payments firm.He said the big interest rate tightening cycle, which began in early 2022, had a disproportionate impact on Canadians.The total household debt exceeds the size of Canada’s GDP, while in the U.S. that figure was less than three-quarters of the size of the economy as of March 31.In the first quarter, Canadian households spent around 15% of their disposable income to meet debt-servicing costs, while Americans paid about 10% of their income, according to official data. Now they are forced to save more to meet debt obligations. Canada’s household savings rate touched 7.2% in the last quarter, its highest in nine quarters, while in the U.S. it was at 2.9% as of July, the lowest since June 2022. That number indicates U.S. consumers were still spending much more despite high rates.($1 = 1.3580 Canadian dollars) More

Dudley, in a Bloomberg Opinion piece, argues that a larger cut is necessary to prevent a potential recession and align monetary policy with the Fed’s dual mandate of price stability and maximum sustainable employment.He highlights that while both price stability and employment are currently more balanced, the current interest rate is still too high.”Monetary policy should be neutral, neither restraining nor boosting economic activity. Yet short-term interest rates remain far above neutral,” he writes. According to Dudley, this gap needs to be corrected swiftly, as continuing with high rates risks pushing the US economy into a deeper slowdown.While economic data has shown some resilience, with the Atlanta Fed’s GDPNow model projecting 2.5% growth in the third quarter, the labor market has started to weaken.Dudley points out that the unemployment rate has increased by 0.8 percentage points since January 2023, while wage inflation has moderated. This weakening labor market, he notes, could reach a tipping point. Historically, when the three-month average unemployment rate rises by more than 0.5 percentage points from its low, it has led to a recession.Dudley believes that the 50-basis-point cut would help the Fed better align its projections with market expectations. He warns that a smaller 25-basis-point move could send mixed signals, potentially leading to confusion over the Fed’s future policy direction.”If the Fed does only 25 now and projects another 50 at its next two meetings this year, it will send a hawkish signal,” he noted.However, the former Fed New York president also acknowledges that the Fed might hesitate to make such a large move due to concerns over inflation. The central bank has been cautious about inflation reaccelerating, and Chair Jerome Powell is determined not to repeat the mistakes of the 1970s.Moreover, even though the US economy has slowed a bit and the labor market has weakened, there are not many signs that it’s in or near a recession.Nonetheless, Dudley still expects the Fed to opt for a 50-basis-point cut.“Monetary policy is tight, when it should be neutral or even easy,” he said. “And a bigger move now makes it easier for the Fed to align its projections with market expectations, rather than delivering an unpleasant surprise not warranted by the economic outlook.” More

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(Reuters) – Mario Draghi’s call last week for a revamp of Europe’s tough pro-competition policy rules prompted much speculation that the EU’s next antitrust chief may take a lighter-touch approach to mergers that could yield European industrial “champions”.While that may ultimately depend on the political mood in Brussels and Europe’s national capitals as the bloc’s economy lags behind its global rivals, there is little for now to suggest a more permissive shift, sources and analysts said.If anything, the EU consensus remains intact that policies that uphold competition, keep down prices and ensure a level playing field across the 27 national markets of the EU are one of the few bright spots in the region’s struggling economy.”If you loosen EU competition rules to build huge companies, create European champions, you will get companies that are French, German and Italian. The smaller countries will wonder ‘What’s in it for us?’,” said one senior euro zone official.Certain deals – for example one that helped a green technology player against Chinese competition – could be politically viable, the official said, but added: “If it were to be across the board, then it is a no-go”.The EU’s high-profile antitrust chief Margrethe Vestager, who only last week scored two major wins against Big Tech on tax fairness and anticompetitive practices, will soon hand over to her successor in a new European Commission lineup.Who that is will depend on fraught negotiations between EU Commission chief Ursula von der Leyen and member states to produce a team reflecting the geographic and political balance within the region, as well as gender and other criteria.But any new arrival will be greeted by a near 900-head Directorate General of Competition which, long-time antitrust watchers say, is institutionally imbued with a belief in the economic benefits of strong competition policy.”And a new Competition Commissioner is always dependent on their services,” said Umberto Gambini, partner at the Forward Global business consultancy and a former European Parliament lawmaker specialised in antitrust and state aid matters.HIGH BURDEN OF PROOFIt is far from clear in any case that what Draghi proposed last week would be a radical departure from the current line.In his long-awaited 400-page report, the former European Central Bank noted “there is a question” about whether vigorous competition policy prevented European companies reaching the scale needed to compete with Chinese or American giants.In particular he proposed that future antitrust rulings take more into account factors such as whether a merger might give the new entity more investment clout to innovate.But asked if that meant any Commission acting on his proposals today would likely rubber-stamp the Alstom-Siemens engineering mega-merger it blocked in 2019, he only said “some of the reasons for blocking that merger would not be there”.”Let me be very clear: we start from a common condition … Competition is good. It is good for investment, good for productivity and good for income distribution,” he said.Indeed, the Draghi report put the burden on the merging parties to justify why any “innovation defence” should override other concerns about their link-up – with an especially high bar for companies that are already dominant market players.That reassured supporters of the strong pro-competition policy promoted by Europe and which the Biden administration has sought to take on board with Lina Kahn as chair of the U.S. Federal Trade Commission.”A lot of people in Europe were telling me the (Draghi) report was going to say we needed less competition enforcement … That is not what he said,” Fiona Scott Morton, senior fellow at the EU economic think tank Bruegel said.Instead she pointed to his proposals on new tools to boost antitrust enforcement; to force firms to make their networks and products interoperable with others’; and how to judge risks such as future product shortages in any merger decision.”There are some nice new ideas as well as a doubling-down to make sure we have productivity in the economy and not a bunch of lazy monopolists who charge high prices and don’t deliver,” she said. More

According to CME Group’s (NASDAQ:CME) closely-monitored FedWatch Tool on Monday, the odds that policymakers will roll out a 50-basis point cut, rather than a more traditional 25-basis point drawdown, stood at 59%. Borrowing costs are currently at a 23-year high of 5.25% to 5.5%.Over the weekend, bets between a quarter-point and half-point decrease were equal, in a sign of the rapidly shifting debate around the cuts.Just last week, investors, persuaded by data last week showing slightly hotter-than-anticipated producer and consumer price growth in August, had placed a higher chance on a quarter-point cut. But recent media reports have suggested that the argument for a 50-point reduction remains in play, while former New York Fed President Bill Dudley said the case for such a cut was strong.In a note to clients on Friday, analysts at Citi said the Fed’s decision is still a “close call,” adding that they are expecting a 25-point cut this week, followed by two 50-point decreases at the central bank’s November and December gatherings.However, the Citi analysts flagged that “weak enough” retail sales data on Tuesday “could push the Fed to cut 50 [basis points.]” Month-on-month, economists see retail sales growth contracting by 0.2% in August after expanding by 1.0% in July.Indications of waning activity could spur the Fed to act more aggressively to help prop up the economy. Officials are already weighing stickiness lingering in the recent inflation numbers, as well as figures pointing to a loosening in the American labor market.Fed Chair Jerome Powell said in August that the “time has come” to adjust monetary policy due to possible “downside risks” facing the jobs picture. The outcome of a potential easing cycle could be one of Powell’s lasting legacies, particularly as the Fed attempts to engineer a so-called “soft landing” — or a cooling in once sky-high inflation that does not lead to a meltdown in labor demand and the wider economy — following a period of elevated interest rates.How do you think the Fed will approach its latest rate decision? Have your say in our poll on X. More