World stocks hit an all-time high and the euro rose on Thursday after the European Central Bank cut interest rates for the first time in nearly five years, but also signalled that further moves could take a while.
ECB policymakers duly delivered their widely expected quarter-point cut to 3.75%, but markets were left feeling a little deflated after the bank also said it now did not expect inflation to fall back to target until 2026.
It was enough to push the gains in the pan-European STOXX 600 to 0.6%, while the euro inched up to almost $1.089 against the dollar and government bond yields — which reflect borrowing costs and move inversely to price — ticked up too.
MSCI’s 47-country main world index rose as much as 0.3% to a record high. On Wall Street, the S&P 500 index was flat near an all-time high, the Dow Jones Industrial Average added 0.4%, while the Nasdaq Composite Index dipped 0.1%, also from an all-time high.
The chip maker Nvidia fell 0.8% from a record high, after crossing $3-trillion in market valuation in the previous session.
“The focus for markets (now) is whether they will find room to cut in September,” Saltmarsh Economics’ Marchel Alexandrovich said.
He said it wasn’t a surprise that inflation forecasts had been revised up. “Inflation is proving sticky and that makes it difficult.”
The euro’s gain, after a 2% rise over the last month, took it to $1.0888, although most traders were sitting on their hands, with ECB president Christine Lagarde stressing at the start of her post-meeting press conference: “We are not pre-committing to a particular rate path”.
Stronger-than-expected data over the last few weeks, plus Thursday’s increase in the ECB’s in-house inflation forecasts, have raised doubts about how many more cuts will be justified this year.
“This was a cautious cut,” said Samuel Zief, head of global FX strategy at JP Morgan Private Bank. “We currently think that September could be next. But (there is) no reason to expect significant reductions any time soon with growth actually picking up steam of late.”
The Bank of Canada pipped the ECB to become the first G7 country to cut rates on Wednesday. The US Federal Reserve meets next week, although it is not expected to move until September at the earliest.
“This move ahead of the Fed was not at all obvious just three months ago,” said Eric Vanraes, the head of fixed income at Eric Sturdza Investments. “We still believe that the first rate cut will come before the fourth quarter, in September.”
Markets are now pricing nearly two quarter-point Fed cuts again this year, with a September move seen as a 68% chance compared to 47.5% last week.
