ECB Gets More Dovish, Market Bets on October Rate Cut

Economic data showing a softening economy and dovish talk by hawkish ECB members point to an almost certain rate cut at the next ECB meeting.

Members of the ECB that used to be more concerned about price pressures than GDP growth are changing their minds. Isabel Schnabel, a hawkish board member, has come out in her address yesterday with a dovish view on policy.

Schnabel highlighted the need to escape stagnation, recognizing that GDP growth in the Eurozone has only expanded by 0.1% for per quarter over the past 2 years.

Adding that the central bank expects growth to continue at a weak pace, due mainly to geopolitical shocks, as well tight monetary policy.

Current monetary tightening has taken interest rates for companies and families to levels not seen in over a decade. Tighter monetary policy was needed to restore price stability by “Dampening growth in aggregate demand,”

She also made a distinction of GDP growth in some areas of the Eurozone in that aggregate growth masked a heterogeneity across countries. Spain and Portugal have seen 4% annual GDP growth since 2022.

On the other hand, countries like Germany have struggled to keep pace, mainly due to its industry-heavy economy. I would also add that it is more exposed to demand from China for its goods and services, which has been waning.

Weak Market Response

The latest comments from an ECB board member, have basically given the perception that an interest cut is certain in October. Yet the stock market seems to be rather impervious to the news on monetary policy loosening.

The DAX is down 0.77% this morning, which shows concerns more for the general state of the economy. The market sees ECB action at this point as possibly being simply too late. The overall Eurozone area has had poor GDP growth over the past two years.

But in particular cracks have begun to rise in German and French economies, where some of its biggest companies are about to lay off thousands of workers. Recently we heard of Volkswagen plans to shut down two plants in German, a first ever in the company’s entire history.

Other German automakers have reduced their profit forecasts, and we recently had the same news from Stellantis, quoted in Paris and Milan, that caused the stock to drop 14% in one day. The CAC is down 0.80% on the day, possibly making 4 straight days in the red.

So, the good news that the market had been expecting for several months may simply not arrive on time. The so-called soft landing, which was often in reference to the U.S. economy, is also a concern for Eurozone stock markets.