European Central Bank Cuts Deposit Facility Rate

The European Central Bank (ECB) has cut its deposit facility rate to 3.25%, a move that surprised no one. The futures market had already priced in 37.7bps worth of cuts for the December meeting. This decision is the third cut in the current easing cycle and was predicted by all 65 analysts surveyed by Bloomberg, including Rabobank's Bas van Geffen.

Concerns Over Growth Outlook

Christine Lagarde, the President of the ECB, has expressed concerns over the growth outlook, particularly in the manufacturing sector. Rising energy costs, competitive pressures, and weaker growth in export markets, particularly China, continue to negatively impact this sector.

Manufacturing and Services Sector

However, manufacturing isn't the only sector causing concern. Rabo Research's Head of Macro Strategy, Elwin de Groot, and Senior Economist, Maartje Wijffelaars, have recently pointed out a 'catching down' effect where services indicators are following manufacturing lower. They argue that the softening services indicators are primarily due to weakness in consumer demand, rather than spillover effects from manufacturing.

Consumer Demand

Rabo Research maintains that the conditions for a pickup in consumer demand still exist. These conditions include a high household savings rate, growing real wages, and further monetary easing. However, this pickup has not yet occurred, creating a divergence between European and American consumers, as illustrated by the strong US retail sales report for September.

US Treasury Curve

The US Treasury curve bear-steepened as 2-year Treasury yields rose by 3.2bps and 10-year yields climbed 7.7bps. In contrast, the German Bund curve also steepened as long-end yields rose, but the dovish message from the ECB, combined with a slightly softer-than-expected CPI print, prompted short end yields to fall and European stocks to rise sharply.

Australian Labor Market

The Australian Bureau of Statistics recently released its labor market report for September, which showed a continuation of strong employment numbers. The unemployment rate held at 4.1% after the August figure was revised down by 1-tick. This was despite the participation rate and the employment to population ratio both rising to new highs.

Reserve Bank of Australia

The Australian labor market remains remarkably resilient and is not providing any signals to the Reserve Bank that favor a near-term rate cut. Rabo Research has been more hawkish than most in sticking to their forecast that the first cut won't arrive until May next year.

Bottom Line

The European Central Bank's decision to cut its deposit facility rate was expected, as were concerns over the growth outlook, particularly in the manufacturing sector. The Australian labor market remains strong, providing no signals for a near-term rate cut. What are your thoughts on these developments? Do you agree with the actions taken by the ECB and the Reserve Bank of Australia? Share this article with your friends and sign up for the Daily Briefing, which is delivered every day at 6pm.