Market expectations for the European Central Bank (ECB) to increase the magnitude of rate cuts in response to economic slowdowns are rising, with some believing that the likelihood of a 50 basis point cut in December has surpassed 50%.
Traders are fiercely debating whether the ECB will cut rates by 50 basis points in December. On Thursday, the currency market for the first time raised the possibility of this outcome to over 50%, following poor French manufacturing and service sector data which increased calls for the ECB to adopt more aggressive easing policies to combat the economic slowdown. However, these calls were somewhat diminished after better-than-expected German economic data, with bets on a 25 basis point and a 50 basis point rate cut by the ECB at the December meeting being evenly matched.
The fluctuation in currency market expectations reflects the growing divide among ECB policymakers. In the face of heightened risks to the economic outlook, more dovish officials such as Mario Centeno advocate for a more substantial rate cut. Others, including Robert Holzmann and Klaas Knot, argue that current economic data does not justify a larger rate cut. Since last week's monetary policy decision, the market's bets on a more significant rate cut have been intensifying.
Piet Haines Christiansen, Chief Strategist at Danske Bank AS, stated, "There is still a lot of data to be released, coupled with recent comments from members of the ECB's Governing Council, which will lead the market to speculate temporarily on a substantial rate cut in December."
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German two-year government bonds, one of the most sensitive bonds to ECB monetary policy, saw their yields fall by nearly 8 basis points to 2.03% on Thursday, the lowest level since early October. Traders also increased their expectations for the ECB's easing in 2025.
Investment institutions, including bond giant Pacific Investment Management Co., have expressed their preference for European fixed-income products with a significant downward trend in interest rates. Meanwhile, Vanguard Group and Goldman Sachs Group are betting that German government bonds will outperform U.S. Treasuries.
ECB President Christine Lagarde stated at a panel discussion in Washington on Wednesday that the central bank is "quite comfortable" with the slowdown in inflation, indicating increased confidence in easing policies.
Nuveen Global Investment Strategist Laura Cooper told Bloomberg Television that next week's inflation data will be an important factor in assessing the likelihood of a 50 basis point rate cut by the ECB in December. She expects the ECB to align with Lagarde's message of a "gradual rate cut."
Eurozone inflation rate fell below the ECB's 2% target for the first time since 2021 in September, but is expected to rise in the coming months. Meanwhile, core inflation rate remains above the 2.7% target.
Cooper said, "I am not inclined to believe that the ECB will make a substantial rate cut. Although the market has scrutinized the Eurozone PMI data more strictly, we do not have a clear understanding that the downside risks to growth are increasing."