CAN THE ECB REALLY CUT IN OCTOBER? – TDS

After disappointing regional PMIs and German survey data, markets are pushing hard for the ECB to cut twice more this year. Fundamentals support a pause in October, but the evidence is growing that the region is softening rapidly, TDS economist James Rossiter notes.

October meeting can end up with a dovish hold

“Importantly, the PMIs have not been strongly correlated with GDP growth over the last 18 months, and Olympic distortions are likely to continue this disconnect in the data. Policymakers therefore won't have seen enough evidence of a slowdown by the 17 October ECB meeting. Markets love PMIs, but central bankers are patient for better-quality data.”

“Inflation & labour market data remain too strong. The ECB's internal Domestic Inflation measure has not fallen as rapidly as other underlying inflation measures. The unemployment rate is at a record low, the participation rate is at a record high, and the high-frequency Indeed wage data that the ECB looks at points to accelerating wages. Bottom line: hot inflation and wages are not yet a thing of the past, arguing for a cautious cutting cycle for now. Lower energy prices help somewhat, though.”

“October could therefore end up being a very dovish ‘hold’ meeting. The market's near-70% chance of a cut is probably about double where we think the true probability lies. That said, the risks are building that the ECB cuts 25bps at each of its meetings from December (rather than quarterly).”