The People’s Bank of China (PBoC) and the European Central Bank (ECB) were in focus yesterday. The PBoC cut the Reserve Requirement Ratio (RRR) by 25 bps while the ECB surprised markets with its decision to raise rates by 25 bps.
Economic data shows strength of American economy
The stock market rose yesterday despite the release of economic data that shows the strength of the North American economy and predicts high interest rates for an extended period of time.
On the positive side, this data may indicate that a soft landing for the economy is possible, which would be the best-case scenario.
In this regard, both the retail sales statistics and the unemployment claims data continue to provide evidence of solid domestic demand and a stable labour market.
Despite remaining steady, market interest rates are already at their highest levels in recent months. The 10-year American bond is still close to 4.30%.
China’s central bank cuts the RRR for the second time this year
China’s central bank announced that the interest rates on the minimum reserve requirement (banks' deposits in the central bank) will be reduced by 25 basis points (bps), which turned out to be a favourable development for the stock market as its performance improved.
Investors reacted favourably to the news as it has the potential to boost China's economy, which serves as a primary driver of global growth.
Yesterday's gains in the American indices were largely a result of this information.
The ECB surprised markets with an interest rate hike
The ECB’s meeting, however, was the most significant event of the day.
The bank’s decision to increase interest rates by 25 bps was somewhat unexpected, as many market analysts did not see it coming.
The view that the ECB should halt rising interest rates was backed by the fragility of the European economies, particularly that of Germany.
However, the central bank made the decision to uphold its commitment to price stability and, given the continued high inflation rate, increased interest rates by an additional 25 bps.
The Euro dropped on the central bank’s move
The market’s reaction to this decision was different from what it usually is in such circumstances.
In theory, a rise in bond yields (market interest rates) and a rise in the value of the Euro would have been anticipated following the ECB's latest interest rate increase.
The Euro, however, dipped below the 1.0700 mark and the yield on German Bund bonds dropped by 4 bps.
Investors are betting that the central bank will have to lower interest rates soon given the weakness of the European economy.
This notion is also influenced by the remarks of the bank’s president, Christine Lagarde, that hint to an end to interest rate hikes soon.
GER10YBond daily chart, September 15, 2023. Source: CAPEX.com WebTrader.
Key Takeaways
- Economic data yesterday indicated to a strong American economy.
- The American economy could experience a soft landing.
- Market interest rates remained unchanged at the highest levels in recent months.
- American indices rose on the announcement that China’s central bank cut the RRR.
- This move is geared towards stimulating China’s economy.
- The ECB rose rates by 25 bps.
- The German Bund bond yield fell by 4 bps.
- The Euro broke the 1.0700 level downwards.
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Sources: Bloomberg, Reuters
