Economy

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The ECB cut its deposit rate by 25 basis points (bps) to 3.50%, as expected, following a similar cut in June, as inflation is now within striking distance of its 2% target and the domestic economy skirts a recession.The refinancing rate, meanwhile, was cut by a much bigger 60 basis points to 3.65% in a long-flagged technical adjustment.The euro briefly touched a session high after the rate decision and was last stood around $1.1028. Government bond yields in the euro area were little changed and European stocks held higher. An index of euro area banks was up 1.8%.Money markets priced in roughly 40 bps of further easing by year end and a roughly 42% chance of a quarter point move in October.COMMENTS: HUSSAIN MEHDI, DIRECTOR INVESTMENT STRATEGY, HSBC ASSET MANAGEMENT, UK:”A rate cut at this meeting wasn’t in doubt. Cooling economic data in the bloc – especially a big drop in wage growth – and a dramatic repricing of U.S. rate expectations over the summer has weakened the hawks’ influence in our view. For the time being, we think the global economic outlook of further disinflation and central bank easing is a decent environment for risk assets… But the outlook remains highly uncertain. The risk of a hard landing remains fairly high, as policy rates remain in restrictive territory. Market volatility is likely to be a key feature heading into 2025.”YAEL SELFIN, CHIEF ECONOMIST, KMPG, UK:”Looking ahead, the path for interest rates remains uncertain. While there is widespread consensus on the Governing Council that policy restrictiveness should be eased, divergent views remain around the pace of cuts. We expect a further one in December this year, taking the deposit rate down to 3.25%. If the outlook weakens further, it will strengthen the case of more dovish policymakers to increase the pace of cuts in 2025, towards a terminal rate of around 2.25%.”LINDSAY JAMES, INVESTMENT STRATEGIST, QUILTER INVESTORS, LONDON:”Today’s news is sure to provide some relief to consumers and businesses, which could help the continent on its way towards an improved economic recovery, but whether the ECB can cut rates again this year remains to be seen.””The ECB has much less wiggle-room than other central banks, so although a further cut in October is not entirely off the cards, the ECB will as always remain heavily reliant on the data that comes out between now and then.” “Ensuring inflation continues to head in the right direction, and particularly making more of a dent in core inflation, will be top of its agenda.”NEIL BIRRELL, CIO, PREMIER MITON INVESTORS, UK:”The rate cut from the ECB was well telegraphed. They will be looking ahead to the prospects for growth, rather than over their shoulder at inflation. It’s all about how steep the path to lower rates will be at the remaining meetings this year and through next year.”Like most other regions, the euro zone economy could do with some stimulus, and this is a step along that path. Economic data over the next few weeks will determine the timing of the next policy move.”CARSTEN BRZESKI, GLOBAL HEAD OF MACRO, ING, FRANKFURT:”Looking ahead, we expect the ECB to eventually step up the pace of further rate cuts. Not this year, but next year. Why not this year? Because currently, German wage negotiations and increasing selling price expectations still point to some stickiness of inflation. And given that the ECB’s track record of predicting inflation on its way up is rather weak, the ECB will want to be entirely sure before engaging in more aggressive rate cuts.” SYLVAIN BROYER, CHIEF EMEA ECONOMIST, S&P GLOBAL RATINGS, LONDON:”As expected, the ECB has implemented a 25-bp rate cut with no additional policy guidance. With wage growth far outpacing productivity and service inflation picking up again, the Governing Council has no reason to accelerate the pace of cutting rates or committing to further rate cuts at this stage.””The upcoming 35-bp reduction in the repo rate is unlikely to have a significant impact. While it may serve as a ceiling for money market rates in the long term, banks currently have little incentive to tap the markets, as their liquidity needs are being fully met by the ECB.”MARCHEL ALEXANDROVICH, ECONOMIST, SALTMARSH ECONOMICS, LONDON:”As expected, the ECB cuts interest rates by 25 bps, and more or less, repeats its statement from June by ‘not pre-committing to a particular policy path.'””The new forecasts show a combination of slightly weaker GDP growth and slightly higher underlying inflation.””Overall, we think the ECB is laying the groundwork for further easing in Q4.” More

The producer price index for final demand rose 0.2% last month, the Labor Department’s Bureau of Labor Statistics said on Thursday. Data for July was revised lower to show the PPI being unchanged instead of edging up 0.1% as previously reported.Economists polled by Reuters had forecast the PPI gaining 0.1%.In the 12 months through August, the PPI increased 1.7% after advancing 2.1% in July. Government data on Wednesday showed consumer prices rising marginally in August, though some stickiness remains in inflation.Cooling inflation and a slowdown in the labor market have positioned the Federal Reserve start its policy easing cycle next Wednesday, with a 25 basis points rate cut guaranteed. The central bank has maintained its benchmark overnight interest rate in the current 5.25%-5.50% range for a year, having raised it by 525 basis points in 2022 and 2023.A 0.4% increase in services accounted for the rise in the PPI last month. Services, which dropped 0.3% in July, were last month boosted by a 4.8% surge in the prices of hotel and motel rooms. But prices for airline fares fell 0.8%. Trade services, which measure changes in margins received by wholesalers and retailers, rose 0.6%. Consumers are pushing back against higher prices, limiting businesses’ pricing power.Portfolio management fees, hotel and motel accommodation and airline fares are among components that go into the calculation of the personal consumption expenditures (PCE) price indexes, the inflation measures tracked by the Fed for its 2% target.Goods prices were unchanged last month after rising 0.6% in July. Energy prices dropped 0.9%. Food prices gained 0.1%. Excluding the volatile food and energy components, goods prices climbed 0.2% after a similar advance in July.The narrower measure of PPI, which strips out food, energy and trade, rose 0.3%, matching July’s gain. The so-called core PPI increased 3.3% year-on-year after climbing 3.2% in July. More

The producer price index increased 0.2% in August, the Bureau of Labor Statistics said Thursday. That matched the Dow Jones consensus estimate.
Initial filings for unemployment benefits totaled 230,000 for the week ended Sept. 7, up 2,000 from the previous period and higher than the 225,000 estimate.

Wholesale prices rose in August about in line with expectations, the final inflation data point as the Federal Reserve gets set to lower interest rates.
The producer price index, a measure of final demand goods and services costs that producers receive, increased 0.2% on the month, the Bureau of Labor Statistics said Thursday. That matched the Dow Jones consensus estimate.

Excluding food and energy, PPI increased 0.3%, slightly hotter than the 0.2% consensus estimate. The core increase was the same when excluding trade services.
On a 12-month basis, headline PPI rose 1.7%. Excluding food, energy and trade, the annual rate was 3.3%.
In other economic news Thursday, the Labor Department said initial filings for unemployment benefits totaled 230,000 for the week ended Sept. 7, up 2,000 from the previous period and higher than the 225,000 estimate.
Stock market futures were little changed after the report while Treasury yields were mostly lower.
On the PPI measure, services prices pushed much of the gain, with a 0.4% monthly increase driven by a rise in services less trade, transportation and warehousing. Another big contributor was a 4.8% jump in guestroom rental.

Goods prices were flat on the month, reversing a 0.6% gain in July.
The release comes a day after the BLS reported that consumer prices rose 0.2% on the month in line with expectations. However, that report also showed that core prices climbed 0.3%, slightly more than expected and pushed higher mostly by an increase in shelter-related expenses.
On an annual basis, headline CPI inflation decreased to 2.5% while core held at 3.2%.
Neither report is expected to keep the Fed from lowering benchmark interest rates by a quarter percentage point when its two-day policy meeting concludes Wednesday. The central bank’s key overnight borrowing rate is currently targeted in a range between 5.25%-5.5%.
Market pricing had indicated some uncertainty over how much the central bank would cut, but recent data along with statements from policymakers have pushed Wall Street into looking in a more traditional quarter-point move, rather than a more aggressive half-point reduction.
Fed officials of late have turned their attention more to a slowing labor market.
The jobless claims report indicated that layoffs have not spiked, though the weekly number has risen slightly over the past several months.
Continuing claims, which run a week behind edged just higher to 1.85 million, an increase of just 5,000 from the previous period.

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LONDON (Reuters) – Revised UK bank capital rules have thrown a lifeline to smaller lenders struggling to poach market share from Britain’s biggest banks, boosting their chances of offering more competitive rates in the 1.7 trillion pound ($2.22 trillion) mortgage market.The Bank of England said on Thursday it would lighten capital reforms on UK banks in a revised interpretation of global rules, known as Basel III, aimed at bolstering the financial system from future crises, echoing moves by regulators in the United States.The amendments reflect the BoE’s twin goals to make the sector more resilient to shocks, while at the same time supporting its competitiveness, with smaller lenders set to reap considerable benefits, industry analysts and sources said.Britain’s smaller banks have been pushing for regulatory change that would allow greater use of internal models to calculate risk weightings on loans, rather than standardised models which can be more punitive.”We have taken the view that if Basel 3.1 is our best estimate of the risk weights, then that is going to be true whether large firms or small firms are doing the activity,” Phil Evans, BoE director of prudential policy, said in a speech.He pointed to “a significant narrowing of the gap” between the standardised approach and modelled approaches that market leaders would typically use, sending shares in some smaller banks higher.Metro Bank was trading up 4.9% at 1134 GMT, while smaller mortgage lender OSB Group rose 2.2% and Paragon Group was up 0.6%.”The package will boost competition among UK banks, by broadening access to the more favourable internal ratings-based approach and giving small domestic deposit takers interim relief from the new rules,” said Tom Callaby, a financial services partner with law firm CMS.The UK’s mortgage market is dominated by several domestic heavyweights including Lloyds Banking Group (LON:LLOY), NatWest and Barclays, and a smaller cluster of mutually owned building societies led by Nationwide.The six largest lenders had a combined market share of 71.6% of all mortgages in Britain at end-2023, according to a Reuters calculation from Bank of England data.COSTS COULD FALLWith base interest rates poised to fall against a backdrop of limp economic growth and sticky inflation, industry sources had predicted some so-called challenger lenders would likely need to consolidate to survive.While some small banks have made a dent in the current account market, few have made real headway in mortgage lending. Rising compliance, technology and labour costs have heaped pressure on returns, reinforcing a case for mergers of the strongest brands to achieve scale.M&A activity in the sector has already soared in the last year, with Nationwide swooping for Virgin Money (LON:VM) and Coventry Building Society joining forces with Co-Op Bank.But the changes announced on Thursday are likely to relieve some of the operational pressures on smaller lenders, giving them greater opportunity to build market share on their own. Michelle Adcock, a director in KPMG’s Regulatory Insight Centre, said the BoE’s new rules could reduce the smaller banks’ cost to income ratios, as they would likely need fewer and less senior people to oversee mortgage lending reporting.”This is not about weakening the capital requirements on smaller banks, but there are some reporting requirements that are simply less relevant for them, and some of those have been dialled down,” she said.($1 = 0.7664 pounds) More

The rate-setting Governing Council said it had lowered its deposit facility rate — the mechanism through which it steers monetary policy — by 25 basis points to 3.5%. The rates on the main refinancing operationsIn July, the European Central Bank left its benchmark deposit rate unchanged at 3.75%, after cutting it from an all-time high of 4% in June. Since that meeting, headline inflation in the eurozone currency area has slowed to a two-year low of 2.2%. Although services inflation has edged higher, some economists have noted that much of the uptick is likely due to the impact of the Paris Olympics, the Financial Times reported.Thursday’s decision comes as the Federal Reserve is also widely tipped to begin ratcheting down borrowing costs next week, in a sign that central banks around the world are reacting to waning in once surging inflation.Policymakers noted that the recent inflation figures have come in broadly as anticipated, leading the ECB to confirm its prior outlook for price growth averaging 2.5% in 2024, 2.2% in 2025, and 1.9% in 2026.Officials did nudge up their forecast for “core” inflation — stripping out volatile items like food and fuel — over 2024 and 2025. They also warned that domestic price gains remained high due to wages ticking up at an “elevated pace,” but added that labot cost pressures are moderating and “profits are partially buffering the impact of higher wages on inflation.”The ECB slightly lowered its forecast for eurozone economic growth, saying it expects a smaller contribution from domestic demand in the coming quarters.In a note to clients, analysts at Capital Economics said these changes are “too small to have much impact on expected monetary policy decisions.”Speaking in a press conference following the decision, ECB President Christine Lagarde stressed that the central bank was not “committed” to a particular rate path and will remain data-dependent prior to making future policy moves.The euro strengthened marginally against the dollar during Lagarde’s speech, while the rate-sensitive 2-year German Bund yield — commonly used as a benchmark for other eurozone bonds — inched higher. More

The euro was last at $1.1019, up less than 0.1%. The German 10-year bond yield, the benchmark for the euro zone, was little changed after the decision at 2.124%, up two basis points on the day. The pan-European benchmark STOXX 600 index held gains and remained higher by 1.1%, while an index of euro area banks was up 1.8%. Attention was now set to turn to the post-decision press conference from ECB President Christine Lagarde at 1245 GMT. More