The economy is facing multiple uncertainties, and the European and American central banks may continue to cut interest rates this year

According to foreign media reports, the Federal Reserve is expected to announce a rate cut at its meeting on November 6th. The market also expects the European Central Bank to cut interest rates again at its December meeting. Industry insiders believe that due to multiple uncertainties in the economic outlook, European and American central banks will continue to cut interest rates this year.

Inflation rebounds, industry weakens

Data shows that the rebound in inflation in Europe and the United States has exceeded market expectations, while the continued weak industrial situation has cast significant uncertainty on the economic outlook.

The latest inflation data released by the European Union Statistics Office shows that due to the impact of rising food prices, the Eurozone's inflation rate in October was calculated at an annual rate of 2.0%, higher than September's 1.7%, and the rebound exceeded expectations. In the current month, the core inflation rate excluding energy, food, and tobacco and alcohol prices was 2.7%.

At the same time, the prospects for industrial production in Europe remain lackluster. Since May, the Eurozone Purchasing Managers' Index (PMI) has been showing a sluggish economy.

The locomotive of the European economy, Germany, confirms the state of the European economy. The latest released inflation rate in Germany for October is 2.0%, higher than September's 1.6%, indicating that inflationary pressure in Germany still exists and inflation may continue to hover at high levels in the future. The German Economic Research Institute recently released a report stating that the German economy is the "problem child" of the European Union. The lack of improvement in the number of manufacturing orders, sluggish investment activities, and long-term structural problems have put the German economy at risk of recession this year, directly affecting the economic growth level of the entire European Union and Eurozone.

The US economy is in a similar situation. The latest data from the Bureau of Economic Analysis shows that in September, the so-called core personal consumption expenditure price index (PCE), which excludes volatile food and energy items, increased by 0.3% month on month and 2.7% compared to the same period last year. Compared with the general expectation of economists, the month on month increase in core PCE is in line with expectations, but the year-on-year increase in core PCE is slightly higher than the 2.6% general expectation of economists.

The latest data released by the Institute for Supply Management (ISM) shows that the US manufacturing PMI fell to 46.5 in October, hitting a new low since July 2023, falling short of the expected 47.6 and below the boom bust boundary.

The latest data released by S&P Global shows that the final value of the US Markit Manufacturing PMI for October was 48.5. S&P Global Chief Economist Williams said that the US manufacturing industry has been in a slump for the fourth consecutive month, marking a disappointing start to the fourth quarter of the manufacturing industry. Although the decline rate has slowed down, the order volume continues to decline at a worrying rate, and unsold inventory has further increased, indicating that factories may further reduce production in the coming months.

Continuing to cut interest rates may be difficult to avoid

Despite a slight rebound in inflation, European and American central banks will continue to implement interest rate cuts to prevent the economic recovery momentum from being interrupted. The European Central Bank has already carried out its third interest rate cut of the year in October. The market expects the European Central Bank to cut interest rates again at its December meeting.

Analysts believe that the focus of the European Central Bank's monetary policy should shift from curbing inflation to addressing the challenges facing economic growth in the eurozone.

European Central Bank Vice President Louis de Gindos stated that the continued decline in inflation rates in the eurozone has brought positive signals, but consumer spending has not recovered as expected. In addition, geopolitical risks and slow global trade recovery may lead to prices remaining high, and the risk of economic downturn is gradually emerging. Monetary policy must be implemented cautiously and gradually to avoid mistakes in situations of high uncertainty.

The Wall Street Journal reported that the Federal Reserve is expected to announce at its meeting on November 6th that it will continue to cut interest rates by 0.25 percentage points, mainly due to inflation continuing to fall towards its 2% target.

The report points out that after three years of high inflation leading to a massive interest rate hike by the Federal Reserve, the Fed is trying to determine at what level interest rates should ultimately stabilize. Although the US presidential election will not affect this week's decision, any policy adjustments made by the next president and Congress to reshape the economic outlook could change the Federal Reserve's interest rate path.

The Chicago Mercantile Exchange's Federal Reserve Watch tool shows a 96.1% chance of a 25 basis point rate cut in November, and a more than 70% chance of a further 25 basis point rate cut in December.

Mestel, who served as the President of the Cleveland Federal Reserve Bank for 10 years and retired in June this year, said, "We are entering a new phase: over time, policy will become less restrictive because the Federal Reserve is more confident in the direction of inflation and believes that the inflation rate will fall back to 2%

The economy is facing multiple uncertainties

Currently, Europe and the United States have entered the track of interest rate cuts, but loose monetary policy is difficult to alleviate concerns about insufficient economic recovery momentum.

The preliminary data released by the European Union Statistics Office recently showed that after seasonal adjustment, the gross domestic product (GDP) of the Eurozone increased by 0.4% month on month in the third quarter of this year. Despite slightly better than expected economic data for the third quarter of the Eurozone, the overall performance for the year was lower than expected, and the outlook is not optimistic.

Data shows that Germany, the largest economy in the European Union, achieved a 0.2% growth in the third quarter, avoiding a technical recession, but key manufacturing sectors remain sluggish. Driven by the Olympic Games and tourism consumption, the economies of France and Spain grew by 0.4% and 0.8% respectively. The Italian economy has not seen any growth.

Martin Wansleben, General Manager of the German Chamber of Commerce, believes that Germany is not only facing cyclical crises, but also stubborn structural crises. Holger Schmieding, Chief Economist of Berenberg Bank in Germany, also stated that without significant policy changes, Germany's economic growth will be very sluggish. He also described France's economic growth as a 'flash in the pan'.

He said that although the European Central Bank's interest rate cut will boost investment, considering the issue of industrial capacity and poor export environment, it is expected that the effect of interest rate cuts on boosting investment will be limited. The GDP growth rate of the Eurozone in the fourth quarter may not match the performance in the third quarter.

Due to the continued sluggish economic activity, the European Central Bank has lowered its economic growth forecast twice. It is expected that the eurozone economy will grow by 0.8% in 2024 and 1.3% in 2025.

The cooling of the US labor market and consumption has also become a focus of industry attention. The latest data from the US Department of Labor shows that there were 12000 new jobs added in October after adjusting for seasonal factors, compared to an increase of 223000 in September. Economists surveyed by The Wall Street Journal previously predicted that due to the impact of the storm and strikes, there would be an increase of 100000 jobs in October. The recent two hurricanes may have limited production in certain areas of the southeastern United States.

What is even more worrying is that further weakness in income growth may drag down consumer spending in the coming months, making the economy more likely to slow down.

The demand for labor in the United States has steadily cooled down. In the three months to October, the private sector added only 67000 jobs per month, the lowest level since the COVID-19 outbreak in 2020. Although the unemployment rate remained stable at 4.1% in October, the proportion of permanently unemployed workers has risen to the highest level this year, which is one of the signs of reduced demand for workers.