Source: Securities Times.
Author: Chen Xiachang.

This week, a new round of "Central Bank Super Week" begins, and multiple central banks around the world will announce interest rate decisions this week.

Among them, whether the Bank of England will follow the European Central Bank in cutting interest rates has become the biggest suspense in the market. And France in the vortex will also release the latest PMI data soon.

In addition, after the Fed's interest rate decision, the outside world will be more focused on the trend of economic indicators. Many Fed officials will speak successively this week on the economic outlook.

Central banks of many countries, including Australia, the United Kingdom, and Switzerland, will hold interest rate meetings this week. Among them, the Bank of England's every move is the most concerned. On the day before the interest rate meeting, the UK's May consumer price index (CPI) and producer price index (PPI) released may provide clues to the Bank of England's interest rate prospects. Given that recent data shows wage growth and service sector inflation are still rising, the market generally expects the Bank of England to continue to maintain interest rates at 5.25%.

Deutsche Bank expects the Bank of England to cut interest rates in August, but the premise is that more evidence of easing inflationary pressures is needed. Deutsche Bank said: "We believe that the risk of further delay in starting rate cuts is increasing, and August rate cuts appear to be more balanced."

ING Bank said in a research report that the market underestimates the possibility of the Bank of England's interest rate cuts next week. The bank's economists said that the market expects to suspend interest rate cuts again this month, and it is expected that only two of the nine Bank of England members will vote to support the interest rate cut, and most people may support interest rate cuts in August. At the central bank press conference in May, Bank of England Governor Bailey said that the interest rate cut could "exceed the pricing range of the current market rate." ING Bank said that this statement "is cautious in wording but sounds like a rare and thoughtful signal from the Bank of England to investors."

In addition to the Bank of England, whether the central banks of Switzerland and Norway, which have already started cutting interest rates, will continue to cut interest rates has also attracted attention. Although the asset sizes of the two central banks are not large enough to cause significant market volatility, they will still become indicators for the market to predict the next steps of the European Central Bank.

After the European Central Bank began a rate cut cycle earlier this month, the follow-up policy path has become the focus. Christine Lagarde, the president of the European Central Bank, said last week that she believes that they are on the right path to bring inflation back to 2%, even if the path ahead is not smooth for the next few months. Luis de Guindos, the vice president of the European Central Bank, also believes that the future inflation in the euro zone may be full of uncertainty and fluctuations. "The next few months will be difficult, but we expect the anti-inflation process to continue from the beginning of 2025." Guindos emphasized that the central bank will not follow a predetermined interest rate route at future meetings. Considering the path of inflation, the European Central Bank will first monitor service prices, including wage and productivity cost.

France: Political turmoil will continue to affect the capital markets. This week, France will announce PMI data for manufacturing and services, but the current focus of investors is the parliamentary elections at the end of the month. Polls show that the extreme right-wing National Alliance Party led by Le Pen has received strong support, which has caused worries about potential political deadlock and excessive fiscal spending. In fact, the French stock market and bond market have already warned against extreme right-wing parties coming to power. Last week, the French CAC40 index fell by 6.23%, evaporating $210 billion of market capitalization, almost giving back this year's gains. The French government bonds, which are traditionally seen as a substitute for German government bonds, are undergoing a round of repricing, and with large-scale sell-offs, the yield of France's 10-year government bonds rose to 3.3320 at one point, and although it has fallen back, the rising safe-haven sentiment has driven the yield spread of French/German 10-year government bonds to the highest level since 2017 last Friday, with the biggest increase in a single week. The three largest banks in France, BNP Paribas, Credit Agricole, and Societe Generale, all fell by 12%-16% last week, the largest decline since the European and American banking crisis in March 2023.

France: Political turmoil will continue to affect the capital markets.

This week, France will announce PMI data for manufacturing and services, but the current focus of investors is the parliamentary elections at the end of the month. Polls show that the extreme right-wing National Alliance Party led by Le Pen has received strong support, which has caused worries about potential political deadlock and excessive fiscal spending.

In fact, the French stock market and bond market have already warned against extreme right-wing parties coming to power. Last week, the French CAC40 index fell by 6.23%, evaporating $210 billion of market capitalization, almost giving back this year's gains. The French government bonds, which are traditionally seen as a substitute for German government bonds, are undergoing a round of repricing, and with large-scale sell-offs, the yield of France's 10-year government bonds rose to 3.3320 at one point, and although it has fallen back, the rising safe-haven sentiment has driven the yield spread of French/German 10-year government bonds to the highest level since 2017 last Friday, with the biggest increase in a single week.

BNP Paribas, Credit Agricole, and Societe Generale, the three largest banks in France, all fell by 12%-16% last week, the largest decline since the European and American banking crisis in March 2023.

According to Barclays Bank's report, if there are no positive catalysts to reassure foreign investors in the short term, Europe's stock fund flows will face further declines. The report said: "We are finding it difficult to find strong reasons to increase holdings in Europe, and we recommend being cautious about the region due to the political situation in France."

According to a report from Bank of America, European equity funds saw outflows of approximately $600 million for the fourth consecutive week. According to data cited in the report from EPFR Global, global equity funds saw inflows of approximately $6.3 billion for the week ending on June 12, while the US stock market saw inflows for the eighth consecutive week. Europe is the only region that has seen outflows of funds this year.

The head of Citigroup's European equity strategy told the media, "Compared to other developed markets, elections in France are often more unstable for the stock market. This volatility may continue for some time. Nevertheless, the current weakness has not altered the fundamental strength of European corporate earnings and overall economy."

The Federal Reserve: Officials will speak intensively.

Several Federal Reserve officials will speak publicly this week. On Tuesday, Philadelphia Fed President Harker will speak about economic prospects, Federal Reserve Governor Lael Brainard will deliver remarks, Richmond Fed President Barkin will speak about the US economy and monetary policy, and Boston Fed President Rosengren will speak. On Wednesday, Dallas Fed President Kaplan will participate in a Q&A, Federal Reserve Governor Quarles will deliver remarks, St. Louis Fed President Bullard will speak, and Chicago Fed President Evans will speak.

Last week's steady US inflation data and Federal Reserve Chairman Powell's comments have fueled expectations for rate cuts in the second half of this year. Previously, Chicago Fed President Evans said that CPI data was "very good," but he pointed out that people should not be too optimistic because this is only data for one month.

UBS Wealth Management Investment Director's Office believes that there will be two rate cuts this year, and the first will be implemented in September. Powell said at a press conference that they still believe that current monetary policy is restrictive. If high interest rates persist for too long, it may lead to a slowdown in economic growth. Powell also downplayed the importance of the dot plot and emphasized that decisions will be based on overall data.

Adrian Cooper, CEO and chief economist of Oxford Economics, said the Fed will start cutting rates in the second half of this year, perhaps in September, but this largely depends on the change in potential inflation, especially compared to wage growth. Over the past few years, rising labor inflation expectations have surprised the Fed and many central banks. He believes that the Fed wants to see decisive evidence that the process of slowing inflation will continue before it truly prepares for a large rate cut.

Editor / jayden