Weakening US inflation fuels indices and precious metals. ECB cut interest rates as expected

At Thursday’s close, the Dow Jones (US30) Index was up 0.58%, while the S&P 500 (US500) Index increased by 0.75%. The NASDAQ Technology Index (US100) closed positive 1.00%. The US stocks rose for the second consecutive day on Thursday thanks to strong performance from technology and semiconductor stocks. Megacap technology companies led the gains: Nvidia (NVDA) rose by 1.9%, while Alphabet (GOOG) and Meta Platforms (META) rose by 2.3% and 2.7%, respectively. Released economic data, including the August Producer Price Index (PPI), pointed to easing inflation, with wholesale prices rising 0.2% month-on-month, slightly above prognoses. This follows a similar trend in consumer price data and reinforces expectations of a 25 basis point interest rate cut at next week’s Federal Reserve meeting.

Equity markets in Europe closed higher. The German DAX (DE40) rose by 1.03%, the French CAC 40 (FR40) closed higher by 0.52%, the Spanish IBEX 35 (ES35) added 1.08%, the British FTSE 100 (UK100) closed up 0.57%.

As expected, the ECB cut the deposit rate by 25 bps to 3.50% from 3.75% and said it will continue with its data-dependent approach. The ECB lowered its 2024 Eurozone GDP prognosis to 0.8% from the previous estimate of 0.9% and raised its 2024 core inflation expectation to 2.9% from 2.8%. ECB President Lagarde said that Eurozone growth risks have shifted to the downside and according to survey indicators, the Eurozone recovery continues to face some headwinds. Swaps discount the odds of a 25bp ECB rate cut at the October 17 meeting at 56%.

WTI crude oil prices rose by 2.5% to $69 a barrel on Thursday due to Storm Francine, which shut in about 670,000 barrels a day in the Gulf of Mexico — more than a third of the region’s oil production. Despite the rebound, oil prices are under pressure due to concerns about slowing demand in major markets such as China and the US. The International Energy Agency (IEA) has highlighted these concerns, noting that global oil demand growth is slowing, especially as China’s economy weakens. The IEA also predicted a potential supply glut in 2024, even if OPEC+ extends production cuts. This scenario suggests that while short-term factors may temporarily lift prices, broader economic concerns, especially those related to China, continue to weigh on the market, making it vulnerable to further declines.

Asian markets were predominantly up yesterday. Japan’s Nikkei 225 (JP225) was up 3.41%, China’s FTSE China A50 (CHA50) was down 0.45%, Hong Kong’s Hang Seng (HK50) was up 0.77% and Australia’s ASX 200 (AU200) was positive 1.11%.

India’s annual inflation rate rose to 3.65% in August 2024 from an upwardly revised 3.6% in July, the lowest since August 2019, and exceeded projections of 3.55%. Despite the rise, inflation remained below the RBI’s target of 4% for the second consecutive month.

Investors and some economists believe the Central Bank of New Zealand (RBNZ) will cut interest rates further and faster than it says as the economy shrinks and inflation slows. Economists believe the Reserve Bank, which began its easing cycle last month, will cut the official money rate to 2.5% by mid-2026 from 5.25% today. Markets are betting it will be forced to change course more aggressively as a prolonged period of higher borrowing costs suppresses demand. Gross domestic product data next week is expected to show the economy contracted in the second quarter, bringing it to the brink of a third recession since late 2022.