Market Update

ECB President Christine Lagarde reiterated the central bank's cautious approach to future monetary policy, emphasizing that rate decisions will be made on a "meeting-by-meeting" basis, driven by economic data. She stressed that the ECB is not “pre-committing to a particular rate path.”
Inflation projections remain largely in line with previous estimates. While inflation is expected to rise later this year, partly due to the waning effects of previous energy price declines, it is forecasted to fall towards the ECB’s 2% target by the second half of 2025. The ECB has slightly raised its forecasts for core inflation (excluding volatile items like energy) in 2024 and 2025, primarily due to stronger-than-expected inflation in services.
European stock markets responded positively to the rate cut, as lower borrowing costs are expected to benefit businesses and consumers. However, the ECB also downgraded its growth forecasts for every year through 2026, signaling concerns about the region's economic outlook.
In the US, stocks also performed strongly this week, buoyed by data indicating that inflation continues to moderate. The Consumer Price Index (CPI) for August showed a 2.5% annual increase, the lowest since February 2021, signaling easing inflation. Wholesale prices also rose by 0.2% in August, matching market expectations and reinforcing the narrative of controlled inflation. This data has bolstered the case for a potential rate cut by the Federal Reserve.
While investors have moderated their expectations for the size of any potential rate cuts, optimism is building ahead of the Federal Reserve’s policy meeting on September 17-18. The market has largely priced in a 25-basis-point cut, with the current target rate standing at 5.25% to 5.5%.
In other news, US consumer confidence rose in September. The University of Michigan’s sentiment index increased to 69, exceeding expectations and reflecting stronger consumer optimism. Consumers’ outlook on both personal finances and the economy has improved, despite lingering concerns about the labor market. Inflation expectations for the year ahead also eased slightly to 2.7%, suggesting reduced worries about near-term inflationary pressures.
Despite this positive sentiment, we remain cautious about potential volatility. Markets tend to move ahead of themselves, and a rate cut doesn’t necessarily signal the start of a broader cutting cycle. We expect policymakers to maintain a data-driven approach, reacting to broader economic trends rather than isolated data releases.
In breaking news, an apparent assassination attempt on former President Donald Trump occurred at his Florida golf course on Sunday. Secret Service agents fired at a suspect after spotting an AK-47-style weapon in the bushes. Trump was unharmed. This incident follows a previous gunman’s attempt to assassinate Trump at a rally in Butler, Pennsylvania, just two months ago. As the November election approaches, investors are closely monitoring the implications of this event, with a tight race expected between Trump and Vice President Harris.
Looking ahead, it will be a busy week for markets. The Federal Reserve, Bank of England, and Bank of Japan will announce their latest policy decisions. While no major changes are expected from the BoE or BoJ, markets are anticipating a rate cut from the Fed. In terms of economic data, reports on US industrial production, retail sales, and PMI will be released, along with CPI, consumer confidence, and PMI data from the UK and Eurozone.