ECB sticks with summer rate cut talk, US GDP surges in Q4 and Tesla falls

The ECB decided to keep rates steady today, as was widely expected. The key takeaway from the press conference was Christine Lagarde who said that she stands by her summer rate cut comments last week in Davos. It is uncharacteristic for an ECB President to deliver a pre-commitment on rate cuts like this. The comments included in the press conference were at odds with the ECB statement, that said the ECB will ‘continue to take a data dependent approach’ to making decisions about monetary policy.

Signs grow that the ECB is moving to a loosening bias

The ECB cannot have it both ways: the President can’t say a rate cut will come in the summer, while also maintaining a data-driven approach to determining when to cut interest rates. Either Lagarde jumped the gun, possibly to annoy all those economists that she is forced to work with at the ECB, or the ECB moved to a loosening bias by stealth. We tend to think it is the latter, and there were clues within the statement accompanying the rate decision that the ECB is shifting its policy stance. Firstly, the ECB stated that ‘almost all measures of underlying inflation declined in December’ and she also said that the ‘disinflation process is at work’ in the Eurozone. Core inflation is what the ECB wants to target, so there is obviously a sense at the bank that rate hikes are working. The ECB has been particularly concerned about wage pressures, but even here there are signs of improvement, and a disinflationary trend could be starting. The ECB said that although wage inflation remains high, and lower productivity levels are keeping pressure on wage growth, both are showing signs of easing. Importantly for the ECB, inflation expectations have ‘come down markedly’ in the short term, and long-term inflation expectations remain around 2%.

Weak growth prospects and signs of lower wage inflation boost ECB rate cut hopes  

Regarding growth, it is hard to talk up the Eurozone’s growth prospects, and Christine Lagarde said that the Eurozone economy most likely stagnated in Q4, even though the data does not come out for another 3 weeks. She said that the growth rate would pick up at some point in the future, at the same time as the ECB expects unemployment to rise. The ECB also pointed to global trade tensions as a threat to European growth.

Europe’s threat from Trump

This could become a real danger if Donald Trump wins the Presidential election in November. He has threatened to put a blanket tariff of 10% on all imports. While there is a risk that this could negatively impact the US economy, it is highly likely that it would hit the Eurozone economy hard, due to the importance of the US as a destination for European exports. Thus, the political drama playing out in the US also needs to feed into the ECB’s monetary policy decisions in the coming months.

The ECB mentioned that tensions in the Middle East and the Red Sea could have a negative impact on the current disinflation trend. However, it is worth noting that this would most likely impact headline inflation, and not core or underlying inflation, which is what the ECB targets. There would not necessarily be a big passthrough from higher headline inflation to core if the Eurozone economy slows as expected this year.

The market impact

Thus, on balance, we think that unless the economic data starts to defy gloomy forecasts, then the stage is set for rate cuts later this year. Markets are flat on the back of this statement, as the ECB didn’t materially change their message. Today’s meeting is supportive of the recent recovery in European stocks and could weigh on the euro in the short term. The bond market is taking today’s meeting as a sign of a dovish bias at the ECB. The German 2-year government bond yield fell 8 basis points after this meeting, and it has stabilized around the lows of the day as we move to the European close.

US growth moderates, but remains strong at end of 2023

Elsewhere, the US economy yet again proved that it is on a different track to Europe and the UK. The Q4 annual GDP rate came in at 3.3%, easily beating the 2% expected by economists. We had mentioned that the US GDP rate could be higher than expected because the Atlanta Fed’s GDPNow tracker was pointing to a 2.4% rate, however even this underestimated the strength of the US economy. The driver of growth was broad based, with personal consumption, exports and government spending all expanding last quarter. The US consumer was firing on all cylinders, with service and goods spending both rising. Goods spending was driven by recreational goods and vehicles, along with pharmaceuticals. Could this be the Ozempic effect? The Ozempic/ weight loss drug craze grew strongly in 2023 and is expected to remain exceptionally strong in 2024. Thus, as US citizens spend money on shrinking their waste lines, this is helping the US economy to expand.

US economy achieves goldilocks status: inflation falls, even as growth expands

Released alongside the GDP data was the QoQ PCE data for Q4. On a quarterly basis it shows that the Fed’s work is done. The Q4 PCE index dropped to 1.7% from 2.6%, and the core rate remained steady at 2%. This suggests that the Fed has achieved what some thought was unachievable: managing to avoid a recession, growing the economy, and at the same time bringing down inflation. While the US is like an economic oasis, its strength is good news for the rest of the world, unless Trump comes along and disrupts global trade. Even so, until that happens, this data supports the Fed’s loosening stance, even if the market has got too far ahead of itself when it comes to pricing in rate cuts, with more than 6 rate cuts priced in for the rest of this year. There’s been a slight uptick in March rate cut expectations on the back of this news, but it remains below 50%. Even so, this data is good news for US stocks, and for a broader market rally than just tech. The decline in PCE could limit the dollar’s upside in the short term.

Investors punish Tesla

Elsewhere, investors have had time to mull over Tesla’s results that were weaker than expected for Q4. They have given a firm thumbs down, after some volatility and mixed reaction in after-hours trading on Wednesday night. Tesla is an auto company, yet it wants to turn itself into a tech company in 2024 and expects its battery storage business to bring in more revenue than autos this year.

Tesla tried to calm the market by touting a new next generation platform that is currently being built that will see its EV production move beyond the Model Y cars. However, it did not give any indication of when this will be producing actual vehicles, and the market seems to have lost patience with Tesla and its constant dramas. The EV space is crowded these days, and Tesla could fall even further behind. While Tesla tried to position itself as the ultimate growth stock, it’s not 2021, and in 2024 investors want to see strong fundamentals before they buy the stock. Its stock is down nearly 10% on Thursday, which is fairly typical of the average stock price decline after Tesla results. Its share price has fallen by close to a quarter since the start of the year, and it is hard to see how these results can help to dig it out of this hole.