Is Europe About to Cut Rates? (FXE, FEZ, USO, GLD)

Today, Zerohedge reported that JP Morgan predicts a 25 bps cut in the benchmark rate at the September meeting of the ECB, which you can see here. Credit Suisse now agrees, citing that ECB rate changes move with the euro area composite PMI, and the recent weakness in this economic indicator will prompt the ECB to cut.

ea_composite_pmi_p.png

The chart above shows how the Purchasing Manager's Index and the change in ECB rates move together, and the analysts at Credit Suisse are now calling for a rate cut as soon as July, as they cite that a cut at the June meeting would be too early. They point to July because there seems to be a 3-month lag to the ECB taking action vs. the PMI. The pair are showing that a 50 bps cut is reasonable at one of the meetings later this year, however, with rates at 1% and the ECB consistently harping on the danger of ZIRP, a 25 bps cut and then a wait and see policy seem more likely.

Even though this news would be euro FXE bearish, it might actually create a spike as people feel that the crisis will ease. The market is probably already pricing in some sort of a rate cut anyways. Look for European stocks FEZ to bounce on the news and look for also a nice bounce in oil USO and gold GLD.

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