Exceptional Federal Reserve Meeting
The ranking of events in the Middle East was also raised to a high-risk level for future economic conditions. Like in March, S. Miran advocated a 0.25 percentage point rate cut.
The most interesting element of the communication was, however, the submission of a separate opinion by three regional Fed representatives. They (Beth Hammack, Neel Kashkari, and Lorie Logan) demonstrated a lack of support for the easing bias embedded in the statement.
It is extremely rare for committee members to submit a separate opinion on the text of the FOMC communication itself, rather than on the level of interest rates.
Regarding personal matters, J. Powell confirmed that his conference yesterday was the last – he will be replaced as chair by Kevin Warsh. Powell will remain on the Board of Governors "for an unspecified period, amid concerns that legal actions (the Fed building renovation – note author) hit the institution." We assess the entire yesterday’s message as mildly hawkish.
Some voting regional Fed representatives feel uncomfortable with the marginally dovish suggestions in the statement. This is not surprising, given their recent remarks.
The surprising part is the way this fact was conveyed, even though it does not necessarily lead them to propose a rate hike at subsequent meetings. We still assume that after a few months of commodity supply stabilization from the Gulf, there will again be potential for a mild downward adjustment of the Fed rate.
Poor Sentiment in the Eurozone and Declining Service Inflation in Germany
According to European Commission research, the leading eurozone business cycle index fell in April more sharply than expected, reaching 93 points (consensus 95.2 points), also hitting its lowest level since the beginning of 2023.
Breaking down the ESI components, service and retail indicators fell sharply, while data for industry (probably cautious production) and construction remained relatively stable.
In Germany, the industrial component even rose slightly, confirming similar observations from Ifo and PMI (inventory purchase effect). For other components, declines were significant (especially for services), confirming a weakening business cycle across the eurozone.
Behind our western border, Destatis released preliminary April inflation data yesterday. It came in at 2.9% YoY (consensus 3.0% YoY).
For the core component, price dynamics were 2.3% YoY, lower than March and the beginning of the year (2.5% YoY).
The service component’s dynamics also fell sharply – to 2.8% YoY from 3.2% YoY last month. Additionally, energy (10.1% YoY, previous 7.2% YoY) and food (1.2% YoY, previous 0.9% YoY) contributed to the aggregate change.
Interpreting yesterday’s overall eurozone readings confirms our baseline scenario.
The weaker business cycle triggered by the Gulf conflict mitigates price pressure outside the energy component. This favors maintaining unchanged interest rates by the ECB.
