Dispatch€s from Frankfurt: ECB Review: October Over?

No news is the news

Photo credit: Charlotte Venema via Unsplash

The main news of today’s meeting was that there is no news (other than the widely expected 25bp cut in the DFR).

The policy statement was quite dry, and the press conference was unexciting in both tone and content, likely helped by the virtually unchanged staff inflation projections.

In particular, the communication was consistent with my pre-meeting framing of an internal governing council compromise featuring unanimity about the decision to cut rates in exchange for non-committal language about future moves, especially October, so as not to encourage the market to price a cut.

Of my pre-meeting checklist, only two elements were missing: Fed-independence (she wasn’t asked, possibly because the market has converged on 25bp for next week’s FOMC following the inflation data), and a recognition of the loss of momentum in the economy.

Glass still half full

The latter was for me the most important takeaway.

While the statement notes that economic activity “is still subdued”, there was little effective acknowledgement of the deterioration in the “second derivative” of growth – the loss of momentum – except in a brief reference to surveys showing continued “headwinds” to growth.

Nor was there any mention of some cracks appearing in the labor market, which Christine Lagarde characterized as “resilient”.

In short, the ECB doesn’t see any new quality emerging from the activity data.

Indeed it expects the recovery to gain pace again (despite a mild downgrade to near term growth), not least because of its anticipation of a recovery in exports on account of a continued recovery in global growth.

Finally, there was no indication that the governing council is seeing risks to growth now as more heavily skewed to the downside.

October over?

In turn, all this does not suggest greater openness towards a cut in October.

President Lagarde specifically emphasized that the September inflation reading would be lower (on account of base effects in the energy component) – I presume lest the market gets excited about it ahead of the October meeting.

My view since August has been that the bar for an October cut is high, as it would require a new shock.

Given that there isn’t an awful lot of additional data to come until the October meeting to provide evidence of such a shock, today’s ECB communication is a major headwind to market pricing for October - even in the case of a surprise (by now) 50bp cut by the Fed next week.

But it probably won’t challenge the market’s notion that the ECB will have to do a lot more in 2025.

I continue to expect the next cut to arrive in December.