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ECB Signals a Rate Cut: Will It Frustrate Trump?

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  • The ECB signaled a rate cut in its monetary policy meeting.
  • Previously, President Trump previously lashed out at the ECB for its dovishness. He sees the ECB’s dovishness as a ploy to depress the euro.

ECB signals a rate cut

On Thursday, the ECB (European Central Bank) released its monetary policy decision. According to the ECB’s statement, “The Governing Council expects the key ECB interest rates to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to its aim over the medium term.”

The current language is more dovish compared to the ECB’s June statement. The June statement said that the ECB expects “interest rates to remain at their present levels at least through the first half of 2020.” In July, the ECB emphasized that it could cut rates even more. Markets are inferring that an ECB rate cut appears to be on the horizon.

ECB’s dovishness 

Globally, most central banks have been dovish since the growth has stalled. Earlier this week, the IMF lowered the global growth forecast. The IMF has lowered the global growth forecast four times since October. The US-China trade war and related uncertainties have been the prominent reasons behind the growth slowdown.

How will President Trump react?

President Trump sees the ECB’s dovishness as a ploy to weaken the euro. In June, Mario Draghi, the ECB’s president, hinted at more stimulus. President Trump tweeted that “Mario Draghi just announced more stimulus could come, which immediately dropped the Euro against the Dollar, making it unfairly easier for them to compete against the USA.” President Trump discussed his frustrations with Fed Chair Jerome Powell. Last month, in an interview with Fox, President Trump praised Mario Draghi. He said, “We should have Draghi instead of our Fed person.”

Will pressure build on the Fed?

The ECB’s dovishness could push the Fed to lower rates. Despite the push from President Trump, Powell hasn’t lowered the rates. However, with US growth stalling and the GDP expected to rise only 1.8% in the second quarter, the Fed might have to act. The financial market, especially the debt market, has signaled to the Fed in no uncertain terms that it expects a rate cut.

While a Fed rate cut may or may not boost stock prices, a lack of the same might spook investors. US markets have been strong this year. While the S&P 500 (SPY) fell sharply in May, it bounced back in June and recorded the best first half since 1997. Looking at the YTD (year-to-date) price action, Apple (AAPL), Amazon (AMZN), Alphabet (GOOG), General Electric (GE), and Facebook (FB) have gained 33.4%, 33.2%, 9.8%, 47.1%, and 56.1% respectively. Facebook released its earnings on Wednesday. Alphabet and Amazon will likely release their earnings on Thursday. General Electric and Apple will likely release their earnings next week.

Exposure to Europe?

The Vanguard FTSE Europe ETF gives you exposure to European stocks. The VGK has gained 15.6% YTD. In contrast, the SPDR S&P 500 ETF has seen an upwards price action of 21.7%.

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