Trade truce does little to quench market expectations for rate cuts in Europe and the US

Trade truce does little to quench market expectations for rate cuts in Europe and the US

Global stockmarkets led by Asia joined in a relief rally after US president Donald Trump and China called a truce in their trade war.

It came as a US manufacturing report showed the big effects of the spat with activity hitting more than a two-and-a-half-year low last month, as new orders received by factories tumbled.

The ceasefire did little to dampen market expectations for interest rate cuts in Europe and the US.

Eurozone inflation remains unacceptably low and the ECB will ease policy further if necessary to boost price pressures, policymakers said, just weeks after ECB chief Mario Draghi hinted at more stimulus.

With growth and inflation slowing for the better part of the last year, the ECB has given up on plans to tighten policy, and policymakers are now debating whether to cut rates further or restart a recently shut, bond- purchase scheme.

However, with interest rates already at a record low, critics say that the potency of its remaining tools is limited and more easing can only provide a modest boost.

Speaking at a conference in Helsinki, former Central Bank head and now ECB chief economist Philip Lane, and Governing Council members Klaas Knot, Pablo Hernandez de Cos and Olli Rehn all emphasised the ECB’s willingness and readiness to act.

“Especially when inflation deviates from its objective for an extended period, central banks including the ECB should adopt clear communication strategies that leave no doubt about their absolute commitment to meeting the inflation objective over the medium term,” Mr Lane said.

And the China trade agreement took little pressure off the US Federal Reserve Fed to stimulate the economy.

“It does appear that ... the negotiations between the US and China are resuming, which is obviously a positive development,” Fed Board of Governors vice chair Richard Clarida said at the same Helsinki conference.

“How those negotiations are resolved is certainly going to be an important factor in thinking about prospects for the global economy,” he said.

Mr Clarida said the US economy is currently “in a good place” but that “uncertainties have increased along several dimensions”.

The two countries agreed on Saturday to resume trade talks after president Donald Trump offered concessions to his Chinese counterpart, Xi Jinping, when the two met at the sidelines of the Group of 20 summit in Japan.

As part of their latest agreement, Washington promised no new tariffs and an easing of restrictions on Huawei agreed to make unspecified new purchases of US farm products and return to the negotiating table.

However, the Fed, which signalled rate cuts could come soon due to uncertainty caused by the trade war, still faces a slowing global economy as well as businesses domestically putting off spending until China and the US reach a lasting truce.

Markets are overwhelmingly betting the Fed’s next move will be its first rate cut since the global financial crisis a decade ago.

Chris Beauchamp, chief market analyst at online broker IG, said participants will closely watch upcoming US manufacturing figures.

“Today’s [market] bounce reinforces the idea that trade wars are the one thing that can really affect this market. The big question is whether the trade truce will have a major bearing on the Fed’s action at its next two meetings,” he said.

Irish Examiner and Reuters

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