The ECB Cuts Again

Here are some of the biggest stories from last week:

• The European Central Bank lowered interest rates for the third time this year.
• UK inflation fell more than expected, while wages grew at the slowest pace since 2022.
• Deflationary pressures are resurfacing in China.
• And the county’s export growth unexpectedly slowed.
• But its economic expansion last quarter slightly beat estimates.
• OPEC trimmed its oil demand forecasts for this year and next.

Dig deeper into these stories in this week’s review.

Europe

As widely anticipated, the European Central Bank delivered its third interest rate cut of the year this week, taking its key deposit rate down by a quarter of a percentage point to 3.25%. The move comes as the bank shifts its focus from fighting inflation – which recently dipped below its 2% target for the first time in more than three years – to supporting the economy. See, the eurozone is losing steam, with households not spending enough to sustain the recovery that started earlier this year, and manufacturers still struggling due to weak demand from outside the region. But while the ECB reiterated that risks to growth remain tilted to the downside, it said that a recession isn’t likely. Finally, although the bank was wary of saying too much about its next steps, traders are betting on cuts at every one of its meetings through March.

UK

The Bank of England had reason to celebrate this week, after new data showed inflation in the UK dipped below the central bank’s 2% target for the first time since April 2021. Consumer prices rose by 1.7% in September from a year ago, slowing from August's 2.2% rate and coming in below the 1.9% forecast by economists. Core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, dropped more than expected, to 3.2%. Finally, services inflation also fell more than forecast, from 5.6% to 4.9% – the lowest level since May 2022. The better-than-expected figures prompted traders to increase bets on further interest rate cuts in November and December, following the BoE’s quarter-point reduction in August.

The big drop in services inflation is likely the most positive takeaway from the report, considering that the BoE closely monitors the metric as a key indicator of domestic price pressures linked to the labor market. And the deceleration goes hand in hand with separate data this week that showed UK wages grew at the slowest pace in more than two years over the summer. More specifically, average earnings excluding bonuses rose 4.9% in the three months through August from a year earlier – the smallest increase since the second quarter of 2022, and down from 5.1% in the three months to July.

China

China released a slew of data this week, painting a mixed picture of the world’s second-biggest economy. First, China’s latest inflation report showed deflationary pressures resurfacing in September, with consumer prices still weak and factory gate prices continuing to fall. More specifically, consumer prices rose by a less-than-expected 0.4% last month from a year ago, marking a slowdown from August’s 0.6% pace. A big jump in fresh vegetable prices helped keep the headline measure above zero. Core inflation came in at just 0.1% – the lowest reading since February 2021. Finally, producer prices, which reflect what factories charge wholesalers for products, fell for the 24th consecutive month, dropping by a bigger-than-expected 2.8% in September.

The figures underscore the weak state of consumer demand before policymakers rolled out a range of stimulus measures in late September to prevent a negative cycle of falling prices and declining economic activity. See, anticipating further price drops, consumers might delay purchases, dampening already weak consumption. Businesses, in turn, might lower production and investment because of uncertain demand. What’s more, falling prices lead to lower corporate revenues, potentially hitting wages and profits. Finally, during times of deflation, prices and wages fall, but the value of debt doesn’t, which adds to the burden of repayments and raises the risk of defaults.

Second, China’s latest trade report showed export growth unexpectedly slowed in September, hinting at weak external demand and dealing a blow to one the economy’s few bright spots. Exports climbed by a much less-than-expected 2.4% in dollar terms last month from a year earlier, marking a sharp slowdown from August’s 8.7% pace. Shipments to key markets including Japan, South Korea, and Taiwan all fell, while exports to the European Union and the US marked their slowest rise in at least four months, as politicians in those regions ramped up tariffs on Chinese imports.

Third, China’s latest GDP report showed economic output rising at its slowest pace in 18 months. The world’s second-biggest economy grew by 4.6% in the third quarter from the same time last year, slightly better than expected but marking the lowest rate of expansion since early 2023. The figures mean that China’s economy has grown by 4.8% in the first nine months of the year – slightly below the government’s official target of around 5%. Having said that, things appeared to have taken a turn for the better during the last stretch of the third quarter, with retail sales, industrial production, and fixed-asset investment all accelerating last month from August. And analysts were quick to point out that the economy could perform better in the fourth quarter given all the new stimulus measures announced at the end of September.

Commodities

OPEC lowered its oil demand growth forecasts for this year and next for the third consecutive month, as the group of the world’s biggest oil-producing countries belatedly acknowledges a slowdown in global consumption. According to OPEC’s latest monthly report, global oil demand is expected to increase by 1.9 million barrels per day in 2024 and by 1.6 million barrels per day in 2025 – both roughly 100,000 barrels per day lower than previously forecast.

With these successive downgrades, OPEC is starting to retreat from the strongly bullish projections it has held throughout the year. But even after the reductions, its demand estimates remain significantly higher than others. The International Energy Agency, for example, reiterated this week that it expects global oil demand to increase by just 1 million barrels per day in 2025. And despite geopolitical risks threatening output in the Middle East, global supplies are plentiful, according to the IEA. That’s why the organization expects a big oil glut early next year. That bleak forecast, along with reports that Israel may avoid targeting Iran’s crude infrastructure as tensions between the two countries escalate, sent oil prices sharply lower this week.

Next week

• Monday: China one-year loan prime rate announcement.
• Tuesday: Earnings: 3M, GE Aerospace, General Motors, Philip Morris International, Verizon.
• Wednesday: Eurozone consumer confidence (October). Earnings: Tesla, IBM, AT&T, Boeing, Coca-Cola, Thermo Fisher Scientific, ServiceNow.
• Thursday: Eurozone, UK, and US PMIs (October).
• Friday: Eurozone M3 money supply (September), US durable goods orders (September), US consumer sentiment (October).