Rate Cuts Abound

The main event of the day was the widely expected rate cut by the ECB. The only data out of the U.K .followed the recent stronger trend with a better than expected Construction PMI for April of 49.4 (48.0 forecast). This saw sterling making fresh 10 week highs at 1.5605, prior to the ECB decision. We also saw the eurozone PMI’s for April come in generally higher than previous estimates, with the manufacturing PMI for the Eurozone at 46.7 (46.5 previously).

Then came the ECB decision, which was mostly as expected, with a 0.25% cut in the main refinance rate taking us to a new record low of 0.5%. The marginal lending (emergency funding) rate was cut by 0.5% to 1.0%, providing additional support for peripheral countries.

Immediately after the decision, the euro strengthened as some had expected a larger cut of 0.5% to the main refinance rate. It appears that several ECB members did argue for a 50 basis point cut. However, in the press conference, comments from ECB President Draghi, that they are technically ready to lower the deposit rate and potentially accept negative rates, saw the single currency weaken significantly to 1.3040 from highs around 1.3220. There remains a strong chance of a further rate cut through the course of the year.

It was a day of rate cuts. Partly shadowing the ECB, the Danish National Bank lowered its lending rate by 0.10% to 0.20%, with the Norges Bank also expected to cut the key policy rate further by 0.25% to 1.25% by mid-year. The Reserve Bank of India also cut rates for the third time this year, to 7.25% from 7.5%. There was little impact in the markets as this was broadly expected, although the RBI has said the scope for cuts is limited due to high inflation and the current account deficit.

Data from the U.S. showed initial jobless claims fell by 18,000 to 324,000 against expectations of 345,000, prompting some USD strength. All eyes will now be on the non-farm payroll and employment numbers. Unemployment is expected to remain at 7.6%, whilst the volatile payrolls number is expected to increase from last month’s very poor 88,000 to around 145,000. There is plenty of scope for surprises, with estimates ranging from 100,000 to 235,000.

Following his departure to the Bank of England, Mark Carney’s successor as governor of the Bank of Canada was announced as Stephen Ploz, which the market took as dovish, seeing the Canadian dollar weaken.