LONDON (Reuters) -The U.S. Federal Reserve has moved back into line with other major rate setters after it cut rates by a quarter point on Wednesday but pushed back against market bets that it would keep going as the Washington shutdown fogs up its forecasting lens.
The Bank of Japan and European Central Bank left rates unchanged on Thursday.
Here’s where 10 major central banks stand after the latest round of meetings:
1/ SWITZERLAND
The Swiss National Bank cut its key rate to 0% in June and is widely expected to hold steady with markets pricing a long pause.
In its first set of minutes detailing its rate setting discussions, published last week, the SNB quashed market speculation that it would return to negative rates to stop the strong franc pushing the sluggish economy into deflation.
2/ CANADA
The Bank of Canada, battling an economic slowdown exacerbated by U.S. tariffs and the inflationary impact of the trade war, cut rates to a more than three-year low of 2.25% on Wednesday.
It also sent strong signals that easing ends here and traders see more than 60% odds on the BoC standing pat until December 2026.
3/ SWEDEN
Sweden’s Riksbank meets next week after cutting rates to 1.75% in September and saying it expects that elevated inflation will prove transitory.
Money markets price in less than a one in five chance of further easing before 2026 as domestic inflation stays sticky, which has sent traders piling in to Sweden’s crown. The currency has risen 15% against the dollar year-to-date.
4/ NEW ZEALAND
The Reserve Bank of New Zealand cut rates by a punchy 50 basis points (bps) to 2.5% this month in an attempt to prop up a frail economy.
Markets see a good chance of a further cut in late November, though inflation sitting at the top of the RBNZ’s 1-3% target band could be a complication.
5/ EURO ZONE
The ECB on Thursday matched traders’ expectations and held the bloc’s main deposit rate at 2% for a third straight meeting.
Traders viewed this ECB easing cycle as almost over, pricing in less than a 50% chance of further easing by July 2026.
6/ UNITED STATES
The Fed on Wednesday executed a widely flagged 25 bps cut but pushed back against market bets for more by warning that data gaps caused by the U.S. government shutdown were clouding its forecasting lens.
“If you’re driving in the fog you slow down,” Chair Jerome Powell said in his post-announcement press conference.
The rate cut drew dissent from two policymakers, with Stephen Miran again calling for a deeper reduction and Kansas City Fed President Jeffrey Schmid favoring no cut given above-target inflation.
Traders price a 70% probability of a 25 bps December cut, down from 84% ahead of Wednesday’s decision.
7/ BRITAIN
The Bank of England is another major rate setter that is signalling cautious moves from here as it kept rates unchanged at its last meeting and said inflation risks remained high.
Traders expect another hold on November 6 but markets price a 60% chance of a December cut after above-target UK inflation at least held steady in September.
8/ AUSTRALIA
The Reserve Bank of Australia has cut rates by 75 bps since February but hotter-than-expected inflation encouraged it to hold rates steady and turn more hawkish in September.
That trend has continued, pushing expectations for the next cut forward to at least February 2026..
9/ NORWAY
Norway’s central bank eased borrowing costs by 25 bps to 4.0% in September but signalled further cuts were less likely because underlying inflation was rising. That has helped the crown keep powering higher against the dollar, with a 12% gain for the year so far.
10/ JAPAN
The Bank of Japan, the sole central bank in hiking mode, kept rates steady on Thursday but repeated its pledge to keep increasing borrowing costs if the economy moves as it projects, shifting investor focus to December’s meeting.
The yen weakened after the announcement.
U.S. Treasury Secretary Scott Bessent this week called for speedier BOJ rate hikes to avoid weakening the currency too much.
(Reporting by Alun John and Naomi Rovnick, Editing by Dhara Ranasinghe and Ed Osmond)
The European Central Bank is tapping fraud mitigation service provider Feedzai to secure its upcoming payment channel, the digital euro. The Lisbon-based Feedzai’s proprietary AI model will help the ECB flag money laundering attempts and stop fraudulent transactions, according to an Oct. 2 release. “Each transaction receives a fraud risk score indicating the likelihood of […]
US treasury secretary Scott Bessent talks about the independence of the Federal Reserve in an interview with Fox News.Photograph: Jacquelyn Martin/AP
US treasury secretary Scott Bessent has said the Federal Reserve is and should be independent but that it had “made a lot of mistakes”, as he defended Donald Trump’s right to fire the central bank governor Lisa Cook.
The president has criticised the Fed and its chair, Jerome Powell, for months for not lowering interest rates. Independent central banks are widely seen as crucial to a stable global financial system. Bessent also rejected the idea that markets were disturbed by the Trump administration’s actions. “S&P’s at a new high and bond yields are fine, so we haven’t seen anything yet,” he said.
Bessent’s comments come as Christine Lagarde, the president of the European Central Bank (ECB), said Trump undermining the independence of the world’s most powerful central bank could pose a “very serious danger” for the world economy.
Lagarde, who was France’s finance minister until 2011 before leaving to run the International Monetary Fund, said it would be “very difficult” for Trump to take control of Fed decision-making on interest rates, but such a scenario would be highly dangerous.
“If US monetary policy were no longer independent and instead dependent on the dictates of this or that person, then I believe that the effect on the balance of the American economy could – as a result of the effects this would have around the world – be very worrying, because it is the largest economy in the world,” she said, according to remarks reported by Reuters.
Guatemala is ready and willing to receive about 150 unaccompanied children of all ages each week from the US, the country’s president has said, a day after a US federal judge halted the deportation of 10 Guatemalan children.
On Monday, Guatemala’s president, Bernardo Arévalo, told journalists that his government had been coordinating with the US to receive the unaccompanied minors.
Nine former officials at the Centers for Disease Control and Prevention have said that Robert F Kennedy Jr’s leadership of the US health and human services department is “unlike anything our country has ever experienced” and “unacceptable”. They also warned that Kennedy’s leadership “should alarm every American, regardless of political leanings”.
The president said Monday he would award Rudy Giuliani the nation’s highest civilian honour, the Presidential Medal of Freedom, two days after his longtime political ally was seriously injured in a car crash.
The decision places the award on a man once lauded for leading New York after the 11 September 2001 attacks and later sanctioned by courts and disbarred for amplifying false claims about the 2020 US presidential election. Giuliani, the former New York mayor, was also criminally charged in two states; he has denied wrongdoing.
Hundreds of protests organised as part of the national “workers over billionaires” effort – a mass action calling for the protection of social safety – were held in cities large and small across the country, including New York, Houston, Washington DC and Los Angeles.
As the Labor Day rallies took place, Chicago mayor Brandon Johnson sharply denounced the Trump administration’s threat to deploy federal troops to the city as part of an immigration crackdown.
For this Labor Day, the Trump administration has draped an enormous banner outside the US labor department with his portrait and the words “American Workers First”. But many labor advocates say Trump has consistently put corporate interests first in his second term as he has taken dozens of actions that hurt workers.
The Morgan Stanley headquarters in New York, US, on Wednesday, Dec. 27, 2023.
Angus Mordant | Bloomberg | Getty Images
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Follow Decision Time for the ECB live Market watchers are expecting the European Central Bank to cut rates by 25 basis points at its meeting later today. If that projection pans out, it’d be the third time the ECB’s cutting rates this year. Catch today’s action on Decision Time, CNBC’s live show analyzing the decision, starting 1 p.m. BST.
New support measures for real estate China’s housing ministry said Thursday it’ll broaden its “whitelist” initiative to all commercial housing projects, which aims to complete the construction of unfinished homes. The ministry also announced that bank loans to developers will be speeded up and nearly double to 4 million trillion yuan by the end of 2024, from the 2.23 trillion yuan already approved.
Potential probe of Intel Intel is potentially facing a security review by the Cybersecurity Association of China. Officials allege that Intel’s CPU chips possess vulnerabilities in security management and flaws in product quality. CSAC also accused Intel of using remote management features to surveil users.
[PRO] A shining sector that’s not tech nor utilities Big Tech stocks, fueled by excitement over generative artificial intelligence, have been responsible for most of this year’s rally in the market. Gen AI is powered by energy-hungry data centers, which benefits the utilities sector. But there’s a new group of stocks that’s fast becoming one of the best-performing sectors for the year.
The pullback in stocks on Wednesday was brief, like a marathoner pausing to drink before pounding the road again.
“Yesterday’s weakness does not change the intermediate and long-term uptrends, and we believe it will prove to be just a pullback within the context of a longer-term uptrend,” Piper Sandler said in a note.
After dipping from its 43,000 level on Tuesday, the Dow Jones Industrial Average rose 0.79% Wednesday to break that barrier again, closing at 43,077.70.
Markets are basking in the glow of a positive earnings season so far. Around 80% of the 50 S&P companies that have posted earnings have topped expectations, according to FactSet data.
Morgan Stanley, for one, reported third-quarter figures that surpassed earnings and revenue estimates. The bank’s profit jumped 32% from a year ago, far outstripping the LSEG estimate and topping several other big banks’ income growth.
The investment banking business was a main source of profit for Morgan Stanley. Supported by the U.S. Federal Reserve beginning its rate-cutting cycle, initial public offerings and mergers and acquisitions are emerging from hibernation, injecting fresh life into Wall Street banks.
Morgan Stanley popped 6.5% after results. The SPDR S&P Bank ETF has jumped more than 6% over the past five trading days. In another sign of the rally broadening, the banking ETF has outstripped the S&P 500’s climb of less than 1% during the same period.
“We anticipate the macroeconomic and earnings environments to remain favorable,” UBS says, “which supports staying invested in equities.”
With monetary policy easing, the economy staying strong and inflation cooling — import prices dipped 0.4% for September, according to the U.S. Labor Department — stocks look like they have stamina to keep going higher.
– CNBC’s Hugh Son, Alex Harring, Jeff Cox, Lisa Kailai Han and Jesse Pound contributed to this story.
The Morgan Stanley headquarters in New York, US, on Monday, Oct. 14, 2024.
Michael Nagle | Bloomberg | Getty Images
This report is from today’s CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.
The pullback in stocks on Wednesday was brief, like a marathoner pausing to drink before pounding the road again.
“Yesterday’s weakness does not change the intermediate and long-term uptrends, and we believe it will prove to be just a pullback within the context of a longer-term uptrend,” Piper Sandler said in a note.
After dipping from its 43,000 level on Tuesday, the Dow Jones Industrial Average rose 0.79% Wednesday to break that barrier again, closing at 43,077.70.
Markets are basking in the glow of a positive earnings season so far. Around 80% of the 50 S&P companies that have posted earnings have topped expectations, according to FactSet data.
Morgan Stanley, for one, reported third-quarter figures that surpassed earnings and revenue estimates. The bank’s profit jumped 32% from a year ago, far outstripping the LSEG estimate and topping several other big banks’ income growth.
The investment banking business was a main source of profit for Morgan Stanley. Supported by the U.S. Federal Reserve beginning its rate-cutting cycle, initial public offerings and mergers and acquisitions are emerging from hibernation, injecting fresh life into Wall Street banks.
Morgan Stanley popped 6.5% after results. The SPDR S&P Bank ETF has jumped more than 6% over the past five trading days. In another sign of the rally broadening, the banking ETF has outstripped the S&P 500’s climb of less than 1% during the same period.
“We anticipate the macroeconomic and earnings environments to remain favorable,” UBS says, “which supports staying invested in equities.”
With monetary policy easing, the economy staying strong and inflation cooling — import prices dipped 0.4% for September, according to the U.S. Labor Department — stocks look like they have stamina to keep going higher.
– CNBC’s Hugh Son, Alex Harring, Jeff Cox, Lisa Kailai Han and Jesse Pound contributed to this story.
(Bloomberg) — Stocks rallied, tracking gains in Asian markets as a tech-fueled rebound spread globally.
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Europe’s Stoxx 600 index jumped 1.2%, the most since mid-August, led by gains in the technology sector. Futures for the S&P 500 were up 0.2%. Treasuries were steady and the dollar was flat. The MSCI Asia Pacific Index climbed the most in almost a month, boosted by gains in the tech-heavy markets of Japan, South Korea and Taiwan.
Risk appetite has returned after the world’s largest technology companies spurred a stock-market bounce on Wall Street on Wednesday. Focus is also on the path for interest rates, with the European Central Bank poised to cut again on Thursday. US inflation data for August supported bets for a Federal Reserve rate cut next week, but fueled speculation officials will move gradually.
Traders have swung between optimism that the Fed will guide the US economy to a soft landing and fear that the central bank has left it too late to cut rates. While swaps have now priced in a 25 basis point rate reduction next week, debate over the path for further reductions continues, and some investors say markets have overpriced expectations.
“Stocks will probably rally more with a 25 bps cut than 50,” because the latter will signal weaker growth, Timothy Moe, chief Asia Pacific equity strategist at Goldman Sachs Group Inc., said on Bloomberg TV.
In corporate news, OpenAI is in talks to raise $6.5 billion from investors at a valuation of $150 billion, according to people familiar with the situation. Nvidia Corp. Chief Executive Officer Jensen Huang said the limited supply of their products has frustrated some customers and raised tensions.
Alimentation Couche-Tard Inc. is discussing improving its takeover proposal for Seven & i Holdings Co. with the goal of convincing the Japanese convenience store operator to start engaging in discussions, people with knowledge of the matter said.
In Japan, the Nikkei index halted a seven-day losing streak as the US inflation print pulled the yen down from its strongest level against the dollar since December. A region-wide gauge of tech stocks rose more than 3% after Nvidia jumped 8.2% overnight, while Taiwan Semiconductor Manufacturing Co. was among top gainers on the regional index.
Oil extended gains from Wednesday as Hurricane Francine ripped through key oil-producing zones in the Gulf of Mexico, prompting traders to cover bearish bets. Gold traded above $2,515 per ounce.
Key events this week:
ECB rate decision, Thursday
US initial jobless claims, PPI, Thursday
Eurozone industrial production, Friday
Japan industrial production, Friday
U. Michigan consumer sentiment, Friday
Some of the main moves in markets:
Stocks
The Stoxx Europe 600 rose 1.2% as of 8:11 a.m. London time
S&P 500 futures rose 0.1%
Nasdaq 100 futures rose 0.2%
Futures on the Dow Jones Industrial Average rose 0.1%
The MSCI Asia Pacific Index rose 1.5%
The MSCI Emerging Markets Index rose 1.3%
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro was little changed at $1.1010
The Japanese yen fell 0.3% to 142.79 per dollar
The offshore yuan was little changed at 7.1282 per dollar
The British pound was little changed at $1.3045
Cryptocurrencies
Bitcoin rose 0.8% to $57,932.51
Ether rose 0.5% to $2,359.36
Bonds
The yield on 10-year Treasuries advanced two basis points to 3.67%
Germany’s 10-year yield advanced two basis points to 2.13%
Britain’s 10-year yield advanced two basis points to 3.78%
Commodities
Brent crude rose 1.4% to $71.59 a barrel
Spot gold rose 0.1% to $2,515.43 an ounce
This story was produced with the assistance of Bloomberg Automation.
(Bloomberg) — European stocks are closing in on a fourth week of gains, lifted by the prospect of lower interest rates after inflation in some of the region’s biggest economies moderated further.
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The Stoxx Europe 600 index added 0.2% at the open, bringing its advance for the week to 1.4% and just shy of a record high. French inflation eased to its lowest level since July 2021 — bolstering the case for the European Central Bank to continue cutting interest rates after similar slowdowns in Germany and Spain. Aggregate data for the region is due later Friday.
US equity futures gained after a flat day on Wall Street, with Nvidia Corp.’s 6% drop weighing on stocks. Traders are awaiting the release of the Federal Reserve’s preferred inflation gauge later Friday.
Bets for a Fed rate cut continue to dominate global markets, after data showed that the central bank has managed to tame inflation without the economy tumbling into recession. US output grew at a slightly stronger pace in the second quarter than initially reported, reflecting an upward revision to consumer spending that more than offset weaker activity in other categories.
“The US economy looks like it’s moving from very strong to strong,” said Thomas Taw, BlackRock’s head of APAC investment strategy, told Bloomberg TV. “The data will continue to weaken, but you kind of have to marry that off with how much is inflation going to weaken in the US.”
Expectations for monetary easing have put Treasuries on course for their longest monthly winning streak in three years. But the wagers have weighed on the dollar, with a Bloomberg gauge of the currency set for its worst monthly performance this year. The dollar was steady on Friday.
Aside from the core PCE data due later in the session, the big focus for financial markets will be next week’s US employment numbers. Nonfarm payrolls figures on Sept. 6 will be scrutinized for clues as to whether the Fed will cut rates in September, after Chair Jerome Powell opened the door to easing at his Jackson Hole speech earlier this month.
US interest-rate cuts are likely to have knock-on effects for central banks the world over. In Asia analysts expect authorities in Indonesia and India to follow suit and potentially lower borrowing costs.
“The soothing Jackson Hole dovish messages continue to resonate, while focus turns to the US employment report to assess if a soft landing remains on track,” Barclays Plc analysts including Gabriel Casillas wrote in a note.
In the commodities space, gold edged lower while oil extended gains on positive US economic data and worsening supply disruptions in Libya. Iron ore edged higher after rallying by about 10% in 10 days to breach $100 a ton.
Key events this week:
Eurozone CPI, unemployment, Friday
US personal income, spending, PCE; consumer sentiment, Friday
Some of the main moves in markets:
Stocks
The Stoxx Europe 600 rose 0.2% as of 8:14 a.m. London time
S&P 500 futures rose 0.2%
Nasdaq 100 futures rose 0.4%
Futures on the Dow Jones Industrial Average were little changed
The MSCI Asia Pacific Index rose 0.7%
The MSCI Emerging Markets Index rose 0.5%
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro was little changed at $1.1076
The Japanese yen was little changed at 144.96 per dollar
The offshore yuan rose 0.1% to 7.0851 per dollar
The British pound was little changed at $1.3173
Cryptocurrencies
Bitcoin fell 0.2% to $59,416.42
Ether fell 0.4% to $2,530.18
Bonds
The yield on 10-year Treasuries was little changed at 3.86%
Germany’s 10-year yield declined one basis point to 2.26%
Britain’s 10-year yield declined one basis point to 4.00%
Commodities
This story was produced with the assistance of Bloomberg Automation.
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European Central Bank President Christine Lagarde is giving a press conference following the bank’s latest monetary policy decision. The central bank left interest rates unchanged on Thursday, after implementing a cut in June.
(Bloomberg) — The euro climbed with European stock-index futures on speculation Marine Le Pen’s far-right party will struggle to win an outright majority in French elections, easing investor concern that Europe’s second-largest economy was headed for a more radical policy shift.
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Futures on French government bonds edged higher, while those on German bunds dropped after the first round of voting showed Le Pen’s National Rally in front of President Emmanuel Macron’s centrist alliance, albeit less comfortably than some polls projected. A very strong showing for her party would have increased the odds of expansive fiscal policy in France, whose deficit already exceeds what’s allowed under European Union rules.
Most Asian shares rose, with Japanese and South Korean benchmarks both gaining. Chinese equities slipped after a report showed factory activity contracted for a second month in June. While data showed the Caixin manufacturing gauge edged up last month, Bloomberg Economics said the marginal improvement did little to counter the worrisome message from official surveys. Hong Kong financial markets are shut for a holiday.
“We are starting off in Asia with that sense of relief that the far-right parties did not get the kind of majority that was feared,” Charu Chanana, a market strategist for Saxo Capital Markets in Singapore, told Bloomberg Television’s David Ingles and Stephen Engle.
In addition to French politics, investors will be looking to the European Central Bank for clues, she said, adding that “there’s been some sense of stability for the euro zone economy after that first rate cut, but we certainly don’t look like we’re out of the woods yet.”
France’s second round of voting will be held on July 7. The French political world is now embarking on a period of horse-trading. In constituencies where three people qualified for the runoffs, the third-placed candidate can withdraw to boost the chances of another mainstream party defeating the far right.
Japan Confidence
Confidence among Japan’s large manufacturers rose, data on Monday showed, leaving the door open for the central bank to consider an interest-rate increase later this month. The yield for the nation’s 10-year bond rose 2 basis points to 1.07%.
One in three economists surveyed by Bloomberg predicts a rate hike at the BOJ’s next gathering. The yen dropped to the lowest level since 1986 last week, prompting some analysts to flag a heightened risk of a rate move as Governor Kazuo Ueda has pledged to watch the yen’s impact on inflation closely.
A swath of data indicated the US biggest economy is cooling without lasting damage to consumers. US consumer sentiment declined by less than initially estimated on expectations inflationary pressures will moderate and the Fed’s preferred inflation gauge marked its smallest advance in six months. Ten-year treasuries were little changed on Monday.
“Going into the second half, there’s a lot of election election uncertainty and we think the dollar will be the best risk-off hedge,” Alex Loo, foreign exchange and macro strategist at TD Securities, told Annabelle Droulers and Shery Ahn on Bloomberg Television. “We do like its appeal as a safe-haven currency.”
In commodities, oil was little changed as traders weighed China’s economic outlook and geopolitical risks in Europe and the Middle East. Gold was also little changed.
Key events this week:
Eurozone S&P Global Eurozone Manufacturing PMI, Monday
Indonesia CPI, Monday
India HSBC Manufacturing PMI, Monday
UK S&P Global / CIPS UK Manufacturing PMI, Monday
US construction spending, ISM Manufacturing, Monday
ECB President Christine Lagarde speaks, Monday
Bundesbank President Joachim Nagel speaks, Monday
RBA issues minutes of June policy meeting, Tuesday
South Korea CPI, Tuesday
Eurozone CPI, unemployment, Tuesday
Fed Chair Jerome Powell speaks, Tuesday
ECB President Christine Lagarde speaks, Tuesday
Australia retail sales, Wednesday
China Caixin services PMI, Wednesday
Eurozone S&P Global Eurozone Services PMI, PPI, Wednesday
Poland rate decision, Wednesday
US FOMC minutes, ISM Services, factory orders, trade, initial jobless claims, durable goods, Wednesday
ECB President Christine Lagarde speaks, Wednesday
New York Fed President John Williams speaks, Wednesday
Sweden’s Riksbank issues minutes of June meeting, Wednesday
Australia trade, Thursday
Brazil trade, Thursday
UK general election, Thursday
European Union provisional tariffs on China EVs set to be introduced, Thursday
ECB publishes account of June’s policy meeting, Thursday
US Independence Day holiday, Thursday
Philippines CPI, Friday
Taiwan CPI, Friday
Thailand CPI, international reserves, Friday
Eurozone retail sales, Friday
France trade, industrial production, Friday
Germany industrial production, Friday
ECB President Christine Lagarde speaks, Friday
Canada unemployment, Friday
US unemployment, nonfarm payrolls, Friday
New York Fed President John Williams speaks, Friday
Some of the main moves in markets:
Stocks
S&P 500 futures rose 0.3% as of 12:50 p.m. Tokyo time
Hang Seng futures fell 0.4%
Nikkei 225 futures (OSE) rose 0.1%
Japan’s Topix rose 0.4%
Australia’s S&P/ASX 200 fell 0.3%
The Shanghai Composite rose 0.3%
Euro Stoxx 50 futures rose 1.1%
Currencies
The Bloomberg Dollar Spot Index was little changed
The euro rose 0.4% to $1.0752
The Japanese yen was little changed at 161.04 per dollar
The offshore yuan was little changed at 7.3016 per dollar
Cryptocurrencies
Bitcoin rose 2.4% to $63,373.65
Ether rose 2.3% to $3,495.2
Bonds
The yield on 10-year Treasuries was little changed at 4.39%
Japan’s 10-year yield advanced two basis points to 1.070%
Australia’s 10-year yield advanced seven basis points to 4.38%
Commodities
This story was produced with the assistance of Bloomberg Automation.
The privileged ability to spend through the dollar’s global reserve status, though amounting to a national debt of unprecedented size, has allowed the U.S. to run circles around Europe in public spending and crisis-time stimulus while subverting debt crises. USGS via Unsplash
If the United Kingdom or France joined the United States, they would become the poorest states in the country, with a GDP per capita lower than even Mississippi. Germany would be the second poorest. For most of the second half of the 20th century, Europe and the U.S. rivaled each other in GDP. In 2008, the EU and U.S. had GDPs of $14.2 trillion and $14.8 trillion, respectively. Closing 2023, the EU has seen little growth, with a GDP of around $15 trillion, while the U.S. has marched ahead to a GDP of $27 trillion.
The EU GDP growth clocked in at 0.1 percent for 2023’s last quarter, a small fraction of the U.S.’s 3.4 percent during the same period. The UK fell into recession in the back half of last year, but the French economy looks to an optimistic forecast of 0.9 percent growth for 2024 to put six months of stagflation in the rearview mirror. While inflation has come down to just above 3 percent, similar to the U.S., the European Central Bank’s rate hikes have taken a larger toll on the nation-states.
One reason Europe has fallen behind? A spending handicap.
After the 2008 Global Financial Crisis (GFC), which originated in the U.S. real estate debt and loaning markets in 2007 and triggered a recession in Europe in the second quarter of 2008, the U.S. and Europe increased stimulus spending and access to liquidity. This increased the debt-to-GDP percent in the U.S. from 61.8 percent in 2007 to 82.0 percent in 2009 and from around 60 percent to 73 percent for the average EU government in the same time period. Because the U.S. benefits from the dollar’s reserve currency status, it can comfortably borrow large amounts at relatively low rates due to the high demand and liquidity of the U.S. treasury market. Europeans cannot take advantage of the same privilege, and thus saw a growing debt crisis in the years following the GFC in countries like Ireland, Greece, Portugal and Spain, which were having trouble paying back the debt their governments had borrowed. The crisis peaked in 2010 when Greece’s sovereign debt was downgraded to junk by rating agencies. Numerous European countries required bailouts from the IMF and EU and instituted new austerity policies that limited public spending.
Such austerity policies became handicaps in dealing with future crises: during the COVID pandemic, the U.S. distributed $5 trillion in stimulus, while the U.K. and Germany spent $500 billion, France spent $235 billion, and Italy $216 billion, as per Moody’s. Though controversial then and a contributor to the steep inflation that followed, the cash cascade likely helped the U.S. spend itself out of a recession. Household savings were at dramatic highs following the pandemic, allowing consumer spending—contributing to 70 percent of the U.S. GDP—to be strong through the Federal Reserve rate hikes. Post-pandemic, the U.S. has continued its public investment streak with the Infrastructure Investment and Jobs Act, CHIPS Act and Inflation Reduction Act, contributing another $2 trillion to its manufacturing and construction sectors and far exceeding EU contributions.
The privileged ability to spend through the dollar’s global reserve status, though amounting to a national debt of unprecedented size, has allowed the U.S. to run circles around Europe in public spending and crisis-time stimulus while subverting debt crises.
A variety of other factors
The explanation of why the U.S. economy has outpaced Europe cannot be reduced to just one reason. Broad structural differences are at play: the U.S. enjoys a large single free trade zone, where capital and labor can unquestionably cross state boundaries without additional tax, tariff or currency conversion costs. Brexit and many other hurdles have tested the EU’s free trade zone. The U.S. is also unusually entrepreneurial: more start-ups are founded in the U.S. than in the European Union, and the U.S. leads the world in VC funding. Eight of the ten largest companies globally by market cap are American; none are European. The U.S. is also the globe’s most attractive place for investment, making the New York Stock Exchange larger than every European stock exchange combined (and that is just one of the U.S.’s equity exchanges). Recent events also serve as obstacles: energy embargos on Russia have been far more taxing on Europe, with the cost of electricity far higher than in the U.S. and not yet returning to pre-sanction levels.
Recent events also serve as obstacles: energy embargos on Russia have been far more taxing on Europe, with the cost of electricity far higher than in the U.S. and not yet returning to pre-sanction levels.
What’s next?
European leaders are eager to act. “We’re in danger of falling out of touch. There is no time to waste. The gap between the European Union and the U.S. in terms of economic performances is becoming bigger and bigger,” former Italian Prime Minister Enrico Letta admitted in a recent report.
Last week, European leaders gathered to discuss the “European Competitiveness Deal,” aimed at helping the continent catch up to the U.S. and China. The policy would upskill workers, make Europe more attractive for capital, reduce the cost of energy and strengthen trade, as per the European Commission. Among Europe’s long-term challenges is that its leaders ultimately need to make their markets an attractive place for Europeans to invest their savings; French President Emmanuel Macronnoted that “Europe has more savings than the United States of America … and every year, around 300 billion euros of these savings go to finance the American economy.”
The U.S. greatly benefits from a stronger Europe, giving it an ally to help curtail Chinese and Russian influence. However, the U.S. has recently levied tariffs against Europe while implementing trade and subsidy policies. European leaders have criticized it as protectionist, reducing Europe’s global competitiveness and growth potential.
European Central Bank President Christine Lagarde on Tuesday said the central bank remains on course to cut interest rates in the near term, subject to any major shocks.
Lagarde said the ECB would monitor oil prices “very closely” amid elevated fears of a spillover conflict in the Middle East. However, since Iran’s unprecedented air attack on Israel over the weekend, she said the oil price reaction had been “relatively moderate.”
Her comments come shortly after the central bank gave its clearest indication to date that it could start cutting interest rates during its June meeting.
“We are observing a disinflationary process that is moving according to our expectations,” Lagarde told CNBC’s Sara Eisen on the sidelines of the IMF Spring Meetings.
“We just need to build a bit more confidence in this disinflationary process but if it moves according to our expectations, if we don’t have a major shock in development, we are heading towards a moment where we have to moderate the restrictive monetary policy,” Lagarde said.
“As I said, subject to no development of additional shock, it will be time to moderate the restrictive monetary policy in reasonably short order,” she added.
The ECB on Thursday held interest rates steady at a record high for the fifth consecutive meeting, but signaled that cooling inflation means it could begin trimming soon.
In a shift from previous language, the ECB said “it would be appropriate” to lower its 4% deposit rate if underlying price pressures and the impact of previous rate hikes were to boost confidence that inflation is falling back toward its 2% target “in a sustained manner.”
The central bank had previously made no direct reference to loosening monetary policy in its prior communiques.
Asked whether a June rate cut might be followed by subsequent reductions, Lagarde replied, “I have been extremely clear on that and I have said deliberately we are not pre-committing to any rate path.”
“There is huge uncertainty out there. … We have to be attentive to those developments, we have to look at the data, we have to draw conclusions from those data.”
Lagarde declined to comment when asked whether three ECB rate cuts this year was a reasonable expectation for market participants.
Policymakers and economists have zeroed in on June as the month when rates could start to be reduced, after the ECB trimmed its medium-term inflation forecast. Price rises in the euro zone have since cooled more than expected in March.
Asked about the central bank’s confidence in inflation continuing to fall in the wake of rising commodity prices, particularly should oil prices spike amid geopolitical tensions, Lagarde replied, “All commodity prices have an impact, and we have to be extremely attentive to those movements.”
“Clearly on energy and on food, it has a direct and rapid impact,” she added.
Earlier on Tuesday, ECB policymaker Olli Rehn said that the prospects for a June rate cut hinge upon inflation falling as expected, noting that the biggest risks to the ECB’s monetary policy stem from Iran-Israel tensions and the ongoing Russia-Ukraine war.
“As summer approaches we can start reducing the level of restriction in monetary policy, provided that inflation continues to fall as projected,” Rehn, who serves as the governor of the Bank of Finland, said in a statement.
“The biggest risks stem from geopolitics, both the deteriorating situation in Ukraine and the possible escalation of the Middle East conflict, with all their ramifications,” he added.
Israeli forces have pledged to respond to Iran’s large-scale air attack on Israel on Saturday. World leaders have called for the “utmost degree of restraint” in the aftermath of the weekend attack, amid fears of an escalation of the conflict in the Middle East.
Speculation that the ECB could soon start cutting rates comes even as investors have slashed their bets on Federal Reserve rate reductions. Traders now ascribe a 20% likelihood of a Fed rate cut in June, after yet another inflation print showed consumer prices remain sticky.
It comes after the bank’s policymakers lowered their annual growth forecast, as they confirmed a widely expected hold of interest rates.
ECB staff projections now see economic growth of 0.6% in 2024, from a prior forecast of 0.8%. Their inflation forecast for the year was brought to 2.3% from 2.7%.
The ECB on Thursday held interest rates steady for the third meeting in a row. The bank was widely expected to leave policy unchanged in light of the sharp fall in euro zone inflation.
The ECB on Thursday held interest rates steady for the second meeting in a row, as it revised its growth forecasts lower.
The bank was widely expected to leave policy unchanged in light of the sharp fall in euro zone inflation, as investors instead chase signals on when the first rate cut may come and assess the ECB’s plans to shrink its balance sheet.
(Bloomberg) — Inflation gauges in the US and euro zone are set to show the smallest annual increases since early or mid-2021, reinforcing sentiment that interest rates won’t be raised again.
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The Federal Reserve’s preferred measures will be published on Thursday, with the personal consumption expenditures price index seen rising 3.1% in October from a year ago. The core measure, which excludes food and fuel and is considered a better gauge of underlying inflation, is expected to have climbed 3.5%.
Euro-region data for November, also due on Thursday, will probably show inflation at 2.7%, the lowest since July 2021. The underlying measure is seen slowing to 3.9%.
Despite the disinflation progress, officials on both sides of the Atlantic insist they want to see more evidence to be sure that consumer prices are durably under control. On Friday, European Central Bank President Christine Lagarde said that “we’re certainly not declaring victory.”
Fed officials are united around a strategy of being deliberate about the path for policy. Minutes of their last meeting showed that they took note of how higher rates were starting to squeeze households and businesses.
The Fed on Wednesday will issue its Beige Book of economic conditions and anecdotes from across the country.
The US personal income and spending report is also forecast to show only a slight advance in inflation-adjusted consumer outlays. The October downshift in demand help explain forecasts for a slowdown in the economy after a third-quarter growth spurt.
What Bloomberg Economics Says:
“The inflation impulse dulled in October, which should allow the Fed to stay on hold through year-end.”
—Anna Wong, Stuart Paul, Eliza Winger and Estelle Ou, economists. For full analysis, click here
The government issues its first revision to third-quarter gross domestic product on Wednesday, the median forecast in a Bloomberg survey calls for 5% growth. Initial estimate of corporate profits are also expected.
Other US data in the coming week include October new-home sales, November consumer confidence, weekly jobless claims, and a key manufacturing survey.
Further north, Canada will release third-quarter GDP data that will reveal whether it entered a recession, though economists reckon on at least minimal growth. Jobs numbers for November will be the last major data point before the Bank of Canada’s rate decision on Dec. 6.
Elsewhere, the Paris-based OECD presents a new set of forecasts, Lagarde speaks to European lawmakers, and central banks from New Zealand to South Korea are expected to keep rates on hold.
Click here for what happened last week and below is our wrap of what’s coming up in the global economy.
Asia
Central bank governors are expected to gather at the start of the week as part of the Hong Kong Monetary Authority’s global financial summit and Bank for International Settlements conference.
Chinese purchasing manager indexes will start being published toward the end of the week, data to be closely watched by investors for signs of recovery in the world’s second-largest economy.
The Bank of Korea is expected to hold rates steady on Thursday, though it continues to face a tricky policy environment where inflation remains sticky, growth weak and household debt on the rise.
South Korea is also set to report on trade data Friday, one of the earliest looks into how global demand was holding up in November.
The Reserve Bank of New Zealand and the Bank of Thailand are set to make their latest rate decisions on Wednesday, while India will report third quarter GDP the same day.
A range of Asian countries will report on manufacturing PMI data on Friday, from India to Vietnam to Indonesia, giving a broader view into how the region’s economies are holding up.
Bank of Japan board members will speak to business leaders and hold press conferences on Wednesday and Thursday, amid continued speculation over the timing for policy normalization.
The country will also report on industrial production and retail sales data on Thursday, plus labor and business spending data on Friday, after figures showed the Japanese economy contracted in the third quarter.
Europe, Middle East, Africa
Testimony by Lagarde to the European Parliament on Monday will provide investors with something to trade on before the inflation data.
Those numbers will arrive after a drip of national reports starting on Wednesday that are mostly expected to show a synchronized decline across major economies, albeit at divergent levels.
While Spanish inflation probably accelerated, it’s seen weakening in France to 4.1%, and the outcome in Germany is also projected lower at 2.7%. Italian price increases are expected to decelerate markedly further below the ECB’s goal, to 1.1%.
Friday may feature the release of several reports by ratings companies. Among them, S&P Global Ratings is scheduled to publish a view on France, and Scope Ratings could do the same for Italy.
Meanwhile, the German government is struggling to hammer out a revised budget after a shock court ruling earlier this month.
In the UK, several Bank of England policymakers are due to make appearances, including Governor Andrew Bailey, while it’s a quieter week for data.
After Sweden’s Riksbank surprised investors on Thursday by halting rate increases, third-quarter GDP on Wednesday may reveal a recession. Economic weakness was one argument economists gave to keep borrowing costs on hold – although Governor Erik Thedeen hasn’t closed the door on another hike.
On Friday, meanwhile, Swiss data could show that the economy returned to marginal growth during the same period after stalling in the prior three months.
Turning east, Poland will publish inflation, seen staying at 6.6% — more than twice as much as in the neighboring euro region. GDP numbers in the Czech Republic may show a recession.
In Israel, analysts expect the base rate to stay at 4.75% on Monday as the central bank continues supporting the currency. The shekel has recovered all losses since Israel’s war with Hamas began in early October, but officials may refrain from cutting rates until next year.
The same day, Ghana, the world’s second-largest cocoa producer, is set to leave borrowing costs unchanged.
Mauritius on Tuesday is also poised to hold rates steady as inflation has eased below the central bank’s 2% to 5% target range earlier than expected. And with inflation quickening again, gas-rich Mozambique is also likely to keep borrowing costs unchanged on Wednesday.
Latin America
Latin America has a light economic calendar in the coming week, with highlights to include mid-month consumer prices index in Brazil and an inflation report by Mexico’s central bank.
Brazil’s mid-November inflation, due on Tuesday, is expected to further decelerate from a year ago, justifying the central bank’s pledge to deliver at least two more rate cuts of half a percentage point.
Mexico releases its inflation report the following day. The document, which usually brings revisions to growth estimates, may shed light on the timing of a much-anticipated monetary easing cycle.
The central bank has signaled that rate cuts are near, but the latest economic activity data, including third-quarter GDP figures released on Friday, showed Latin America’s second-largest economy is performing better than economists forecast.
Chile publishes a number of activity and production reports starting on Thursday, the most important being Friday’s Imacec index of economic activity for October. The indicator, considered a proxy for GDP, had its biggest gain in eight months in September, surprising economists.
Also on Friday, Brazil releases industrial production for October, while Mexico publishes remittances data for the same month.
–With assistance from Monique Vanek, Piotr Skolimowski, Yuko Takeo, Molly Smith and Laura Dhillon Kane.
(Bloomberg) — After the most aggressive monetary-tightening campaign in four decades, academics and economic practitioners are running autopsies on what could have prevented the cost-of-living crisis and how to ensure the same mistakes won’t be repeated.
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Markets have scrambled to price in high-for-longer interest rates, with a new war in the Middle East adding yet more risk to an already uncertain outlook confronting central bankers as they gather for their penultimate meetings of a tumultuous year.
The policy navel-gazing is centering around three debates. How much flexibility central banks can allow in reaching their inflation targets, the effectiveness of asset purchases in the policy mix, and the merits of monetary and fiscal coordination.
Bloomberg surveyed economists from around the world to gather views on those three debates. Their verdict: Central banks won’t break their economies in a rush to hit inflation targets, QE will be used more sparingly in the future, and fiscal policy risks countering the work of monetary authorities.
What Bloomberg Economics Says…
“A long period of galloping price gains, and fears that the last yards back to target could be most painful for workers, have reignited the debate about whether central banks should aim for a higher rate of inflation. That’s a conversation worth having. But for monetary policymakers, the imperative of retaining credibility means the right time for it is after inflation is back at target, not before.”
— Tom Orlik, chief economist
Rethinking Targets
So long as people believe prices will get back toward 2%, central bankers have some leeway in deciding how aggressive they need to be in pursuing that goal.
Economists covering 16 of the world’s most important central banks say policymakers will allow more time to bring inflation back to target if it means less damage to their economies. The Bloomberg special survey also shows that a sizable minority sees them going even further, accepting price pressures that are either slightly too strong or too weak — as long as expectations remain anchored.
Olivier Blanchard, a former IMF chief economist, has long argued in favor of raising the inflation target, and former European Central Bank Vice President Vitor Constancio has also embraced the idea. But it’s a controversial view and only possible from a position of credibility, which means central banks would likely have to get inflation back to 2% first.
“It would be a mistake of the first order to think you can change a goal you have set if you can’t achieve it,” according to Bundesbank President Joachim Nagel.
Global trends suggest inflation will be stronger than in the past, with former Bank of England Governor Mark Carney among those saying rates won’t return to pre-pandemic lows.
One lesson Gita Gopinath, the IMF’s No. 2 official, draws from the latest inflation episode is that policymakers mustn’t assume that looking through supply shocks — as text books suggest — is the optimal response. She recommends they be ready to react preemptively, even when inflation hasn’t yet spun out of control.
They may be called into action soon on that front, should an escalation in the conflict in the Middle East hit oil deliveries.
When the next big global slowdown comes, though, flexibility may be needed the other way. Europe’s eight-year experiment with negative rates ended with mixed reviews last summer as to whether it was all worth it.
The Bank for International Settlements argues that there’s room for greater tolerance for moderate shortfalls even if they’re persistent, because “low-inflation regimes, in contrast to high-inflation ones, have self-stabilizing properties.”
Rethinking Quantitative Easing
With a more flexible approach to those 2% targets, monetary policy after the 2008 financial crisis would have looked very different in many parts of the world. Trillions of dollars, euros, yen and pounds of asset purchases did little to raise prices in the face of global disinflationary forces until governments used the money they raised to stuff cash into consumers’ pockets during Covid lockdowns.
But that’s also been blamed for distorting financial markets. Episodes such as the Silicon Valley Bank blow-up are seen by some as a direct result of central bank reserves creation under QE, along with regulatory and supervision failures.
Only 40% of economists surveyed predict central banks will use QE the same way as they did before. A quarter expect them to deploy it more sparingly, about 30% see its only role going forward as a tool to address financial-stability concerns and a small minority doesn’t see it being used again at all.
There are other problems with bond-buying that may affect how it’s used in the future. QE effectively swaps long-term borrowing costs for short-term ones. What’s been a lucrative deal for taxpayers when official interest rates were low has now turned into a disastrous trade.
The clearest depiction of the problem is in the UK, where the BOE secured taxpayer indemnity for any losses on QE. Over the next decade, it estimates, its purchases will cost the government over £200 billion ($243 billion).
And policymakers have little experience in unwinding their balance sheets, where small mistakes can trigger big market turbulence.
The Fed experienced some of that when it tried to shrink bond holdings between 2017 and 2019. More recent efforts to reduce portfolios have progressed rather smoothly, partially because central banks have amassed so much debt over the years that they’re far away from any thresholds that would trigger a squeeze.
But the fact that they’re treating quantitative tightening as a technical adjustment rather than a part of their efforts to conquer inflation raises questions about the future use of a tool that’s only trusted to work one way.
The ECB faces an extra legal burden on bond holdings that comes with operating in a currency union of 20 countries. Concerns around illegally financing governments and debt mutualization have already landed the central bank in court several times.
Mixing Policies
Low interest rates and large-scale QE programs allowed treasuries to borrow on the cheap to finance stimulus campaigns, protecting labor markets, businesses and consumers from collapse. But the spending blowout throughout and since the pandemic — part critical emergency funding, part political need to show an all-hands-on-deck approach in crisis — contributed to the latest outbreak in inflation.
While the same kind of pulling in the same direction is needed to restrain demand, many governments are concerned that if they tighten policy too hard, voters will kick them out and replace them with populists or extremists. That’s reviving questions about whether central banks can deliver price stability all on their own.
“If we were designing optimal policy arrangements from scratch, monetary and fiscal policy would both have a role in managing the economic cycle and inflation, and that there would be close coordination,” Philip Lowe said in his last speech as Australian central bank governor in September.
Economists surveyed by Bloomberg predict fiscal policy will somewhat counteract the Fed’s efforts to rein in inflation in the US.
“It’s true that there are circumstances where working hand in hand and supporting each other has proved helpful,” ECB President Christine Lagarde told a panel discussion in June at the institution’s annual economic forum.
Fed Chair Jerome Powell, who sat to her right, signaled he wasn’t ready to rely on that kind of cooperation. “Our assignment is to deliver price stability kind of regardless of the stance of fiscal policy.”
Central bankers warn that any failure to scale back fiscal spending risks coming at the cost of yet higher interest rates. They also want elected officials to put in place policies that help deliver sustainable growth.
“A change in mindset needs to happen,” said Agustin Carstens, the former governor of the Bank of Mexico who’s now the general manager of the BIS. “Growth needs to depend less on fiscal and monetary policy, it should depend more on structural policies.”
–With assistance from Philip Aldrick, Rich Miller, Harumi Ichikura, Cynthia Li, Sarina Yoo, Andrew Langley and Zoe Schneeweiss.
Rene Haas, chief executive officer of Arm Ltd., center, during the company’s IPO at the Nasdaq MarketSite in New York, US, on Thursday, Sept. 14, 2023.
Michael Nagle | Bloomberg | Getty Images
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The long reach of Arm Arm shares surged almost 25% on its first day of trading on New York’s Nasdaq, and a further 6% in extended trading. The chip designer priced its shares at $51 a piece in its initial public offering. Shares of Arm began trading at $56.10 a share and ended the day at $63.59. That gives the company a fully diluted market cap of about $68 billion, and a price-to-earnings multiple higher than Nvidia’s.
Markets rebound U.S. stocks rose Thursday, aided by Arm’s electrifying showing and promising economic data from the U.S. The Dow Jones Industrial Average, in particular, rallied 0.96% for its best day since August. European markets traded higher, with the regional Stoxx 600 index climbing 1.52% and other major bourses adding at least 1% following the European Central Bank’s rate decision.
Record rates in the EU The ECB raised rates by 25 basis points to 4%, a record high reached after 10th consecutive hikes since June 2022 when rates were -0.5%. The good news is that the ECB indicated it may be holding off further hikes. “ECB interest rates have reached levels that … will make a substantial contribution to the timely return of inflation to the target,” the bank’s council said.
Focus on the core The U.S. producer price index, which measures wholesale prices, rose a seasonally adjusted 0.7% in August — far more than the 0.4% estimate — and 1.6% from a year earlier. August was the biggest monthly jump in more than a year. However, when stripping out food and energy prices, the month-over-month PPI was 0.2%, in line with expectations, and 2.1% on an annual basis, the lowest since January 2021.
[PRO] No secret sauce for HP Warren Buffett’s Berkshire Hathaway sold a portion of its stake in HP. This year hasn’t been kind to the computer and printer maker, as its fiscal third-quarter earnings missed Wall Street’s expectations. CNBC Pro’s Yun Li breaks down what Berkshire’s play in HP initially was, and whether it’ll change going forward — based on another bet the company has made in the past.
When you have a toothache, your whole body feels the pain. In the same vein, when Arm experienced a flush of wellbeing, it radiated through markets’ entire body, giving them their best day in weeks.
“The successful IPO of Arm … instills some confidence that perhaps the capital markets window is going to open again after virtually being closed for the last 18 months,” said Art Hogan, chief market strategist at B. Riley Financial.
Big banks rallied on excitement that the sleepy IPO market for tech companies might finally be stirring. (More IPOs means more dealmaking — and higher revenue — for banks.) Shares of JPMorgan Chase rosealmost 2%, Morgan Stanley gained 2.09% and Goldman Sachs popped 2.86%. Tech IPOs are particularly important to Goldman as the bank relies on investment banking more than its rivals. With Instacart and marketing firm Klaviyo set to list soon, Goldman — which has been struggling of late — might see a change in its fortunes.
Goldman and JPMorgan are big components of the Dow. That helped the blue-chip index rise 0.96%, its best day since Aug. 7, giving it a closing level above its 50-day moving average for the first time since Sept. 1. The S&P 500 advanced 0.84%, its best showing in around two weeks, and the Nasdaq Composite gained 0.81%.
Meanwhile, a tame core PPI reading for August assuaged worries — somewhat — after core consumer price index was higher than expected. As PPI is considered a leading indicator, that is, it predictsthe future state of the economy, while CPI is a lagging indicator, markets found solace in the idea that things aren’t as bad as the CPI appeared to portray.
And August retail sales jumped 0.6% against the 0.1% expected. Taken together with the PPI report, that suggests the U.S. economy, supported by an indefatigable consumer, might skirt a recession even as inflation gradually cools.
“You’ve got the perfect framework of inflation heading in the right direction, but the economy not falling apart,” Hogan said. “And that really paints the picture that the Fed has done the right thing and we may well be orchestrating that elusive soft landing.”
But the economy is infamously volatile. Hence Hogan’s all-important caveat: “At least that’s the impression we get this week.” Still, after markets ended in the red last week, any reprieve, however temporary, will be welcome.
A customer exits a Piraeus Bank SA bank branch in Thessaloniki, Greece.
Bloomberg | Bloomberg | Getty Images
“They just want profits, they don’t think about people.”
Those words from Marco Oliveira, a 50-year-old graphic designer from Portugal, underscore a deep lying annoyance in Europe with people bemoaning a lack of return on their savings despite surging interest rates.
“We are not getting good rates,” a 56-year-old Spaniard, Carlos Stilianopoulos, confirmed to CNBC.
European savers complain their banks have been quick to raise mortgage payments as the European Central Bank has pushed up its benchmark rate, but have been very slow at increasing rates for savings accounts.
In order to bring down inflation, the ECB has raised rates several times since July 2022. This, in practice, should translate into higher rates both on mortgages, but also on deposits. However, data shows this is not quite the case.
The key metric used by analysts is the deposit delta — which represents the increase in policy rates that banks pass through to the interest rates on deposits. The higher the figure is, the more banks are passing on.
According to Dutch lender ABN Amro, the average deposit delta in the euro zone in June this year was 47% — this means that on average only half of the total 4.25 percentage point increase in ECB interest rates has been passed on to depositors. The ECB raised its benchmark rate in July 2022, from -0.5% to 0%. The rate is now at at 3.75%, meaning that since that first rate hike the ECB’s main rate has risen by 4.25 percentage points.
However, the average deposit delta across the 20 countries that share the euro masks stark differences among those nations. For instance, Croatia’s deposit delta is 12%, Cyprus is 30% and Portugal stands at 32%. In France, the deposit delta is 73% and in Italy it is 62%.
Even though euro zone nations share the same currency and they are under the same monetary policy decisions, savers across the region are not enjoying the same returns on their deposits.
“There are indeed some stark differences among European countries,” Marta Ferro Teixeira, analyst at ABN AMRO, told CNBC via email.
“This is the result of differences in the structure of the banking industry, nature of deposits, and alternative investment opportunities,” Teixeira said.
S&P Global compared how much euro zone banks were now passing on to that seen in 2005, when the ECB last entered a rate-hiking cycle. It concluded that banks are now much slower completing this task.
Nicolas Charnay, a primary credit analyst at S&P Global, cited a few reasons behind the discrepancy. Speaking to CNBC, he said differences in banks’ liquidity levels and the various degrees of market competition impact what’s on offer for savers.
Given the low rates offered on deposits, some retail investors have been searching for more attractive investments elsewhere. For instance, in Portugal, government debt certificates were offering 3.5% earlier this year and savers were pouring into this asset class. That’s until the government decided in June to cap returns at 2.5%.
“Some say that the change was the result of pressure from the banking sector on the government. And indeed, Portuguese banks show one of the lowest deposit delta, being the fifth worst in Europe,” Teixeira said.
Filipe Garcia, a Portuguese economist, told CNBC that lenders in his country do not feel they need to attract more savings from customers, and without competition inside the sector, the rates offered to savers will not go up significantly.
Disgruntled savers could still raise problems for the banking sector.
“Banks should pay more for deposits with the aim to manage the relationship of trust they have with clients,” Garcia said, adding that customers feel defrauded given they are paying more for their mortgages, but not feeling the benefit on their savings.
“The public has not forgotten the government support to the banks during the [sovereign] debt crisis,” Garcia said.
Portugal, like a handful of other European nations, had to undergo deep changes to its banking system in the wake of the global financial crisis of 2008 and the subsequent euro zone sovereign debt crisis. Feelings toward the banking system then became even more agitated with lenders notching healthy profits.
A customer uses an automated teller machine outside a Caixabank SA branch in Barcelona, Spain.
Bloomberg | Bloomberg | Getty Images
Data collected by S&P Global shows that, during the last reporting season for 25 banks in Europe, 19 reported quarter-on-quarter increases in net interest income. A higher net interest income means banks are getting more money from lending than what they are paying on deposits.
Higher profits are spurring a debate about windfall taxes. Italy has become the latest nation to announce a 40% levy on banks’ profits and, though the measure is still undergoing adjustments, it shows how some lawmakers want to tap banks’ returns.
Spain approved a windfall tax on banks last year and it could raise as much as 3 billion euros ($3.3 billion) from it by 2024, according to Reuters.
“It is a PNL [profit and loss] issue,” Stilianopoulos from Spain said, adding that banks are enjoying a “free ride” by charging more from mortgage holders and not passing higher returns to savers.
He said, however, that governments and regulators are not stepping in — for now — because they are more worried about banks than savers.
“When banks are making money, they [government and regulators] do not need to save them,” he said, referring to the sovereign debt crisis.
Indeed, there are questions regarding the regulators and why they are not taking more action.
In the U.K., the Financial Conduct Authority announced an action plan in late July to ensure lenders were passing on interest rate rises to savers “appropriately.”
“We want a competitive cash savings market that delivers better deals for savers, where interest rates are reviewed quickly following base rate changes and firms prompt savers to switch to accounts paying higher rates,” Sheldon Mills, executive director of consumers and competition at the FCA, said in a statement.
At the time, FCA data showed that nine of the biggest savings providers, on average, only passed through 28% of the base rate rise to their easy access deposits between January 2022 to May 2023. However, for savings on a notice or fixed term, the same nine financial providers were passing through 51% of the base rate increase.
For its part, ECB officials have also reiterated that banks need to pass on these higher rates to savings, but there’s been no full investigation or action from regulators so far.
“Remuneration of deposits should go in parallel with rate rises on the assets side of the banks. Rates should go up not only for credits but also for deposits. This is something we are looking at very carefully,” ECB Vice President Luis de Guindos said in February.
