ECB expected to slash rates in 2024 despite todays improved services PMI data

European markets are taking a more constructive view following an Asian session that saw sharp declines across China related stocks. A decision from Moody’s to cut the Chinese credit outlook raised concerns over the sustainability of the country’s fiscal pathway. While they opted to leave the long-term credit rating for Chinese sovereign bonds at A1, the shift onto a ‘negative’ outlook highlights concerns that their current fiscal spending habits pose a risk to the economy. With China faced by a real estate crisis that undermines the recovery from a zero-covid world, this critical assessment of recent fiscal spending levels does raise concerns that any additional stimulus will be limited in nature.

The Australian dollar has been the big mover overnight, with markets reacting to an RBA rate decision that saw the bank keep rates steady as expected. The Aussie dollar has been one of the big outperformers over the course of recent weeks, although that looks at risk as markets shift away from expectations of an additional rate hike in the coming months. However, what was originally a base case scenario has now become a mere 20% outlier event, with markets instead looking for a prolonged pause before a November 2024 rate cut.

A raft of European PMI data further enhanced the notion that we are seeing a soft landing in the eurozone, with improved services sector readings across Italy, France, Germany, and the eurozone as a whole. Nonetheless, with 2.4% inflation now joined by another services sector contraction, markets are increasingly confident (75% chance) that we will see a March rate cut from the ECB. Incredibly, we are seeing markets price 150 basis points worth of rate cuts from March onward, which represents a potential six cuts in the final seven meetings of 2024. Whether this is realistic will likely become a key topic moving forward, with market volatility expected if central bankers feel the need to reign in those somewhat extended expectations.