The European Central Bank is widely expected to cut euro zone interest rates this week.
The first interest rate cut in 20 years is seen as a positive sign for Europe's shrinking economies, hit by slowing growth and worsening demographic trends.
Average inflation rates across euro area countries have been on a mostly downward trend since last year, reaching an annualized rate of 2.4% in both March and April, down from a peak of 10.6% in October 2022.
However, the measure is highly dynamic within the bloc, ranging from a low of 0.4% in Lithuania to a high of 4.9% in Belgium.
The ECB began its latest rate hike cycle in July 2022. The ECB's key interest rate, the European version of the federal funds rate, has been raised a total of 10 times and now stands at 4%, where it has remained since September last year.
The June cut will reduce interest rates by 25 basis points to a minimum of 3.75%.
But the steady pace toward an ideal benchmark of 2% annual inflation may hit a roadblock this month, with Eurostat, the euro zone's main statistics agency, estimating that inflation rose to 2.6% in May, above the expected 2.5%.
If approved, the move would not disrupt plans to cut interest rates, but could influence the ECB's decision to suspend interest rates in July and slow the pace of cuts thereafter.
Bloomberg Economics expects a pause on rate cuts in July, with further cuts in September, October and December.
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What this means for the United States
The timing of the EU's latest inflation cycle coincides with a wave of rising prices in the US. Both regions have been affected by the same variables – energy prices, for example, have been affected by the war between Ukraine and Russia.
But inflation in the bloc has been easing at a faster pace than in the United States.
U.S. annual inflation rate fell to 3.4% in April from 3.5% in March.
On Friday, personal consumption expenditures, the Fed's preferred gauge of inflation, were released for April, showing a steady increase of 2.7% year-on-year.
In an interview on Monday, the Minneapolis Fed president Neel Kashkari He argued for maintaining the U.S.'s current federal funds rate for a longer period to avoid risking jeopardizing America's economic prosperity.
The EU decision will further widen the gap with U.S. borrowing costs, where the federal funds rate is currently between 5.25% and 5.5%.
Canada is also expected to cut interest rates this week, with the decision due to be confirmed on Wednesday, widening the gap in borrowing costs north of the border and putting further pressure on the Fed to start cutting rates sooner rather than later.
Canada's annual inflation rate is also on a better trajectory than the U.S., falling to 2.7% in April from 2.9% in March.
The jobs report due this Friday will provide further information for the Fed's upcoming decisions, with economists projecting that the Fed added 190,000 jobs in May.
Stocks and other assets to watch
Fixed-income securities such as Treasury bonds tend to rise when interest rates are cut.
Prices are likely to be influenced by expectations of upcoming interest rate cuts in the US.
Last week, Bank of America's chief investment strategist Michael Hartnett He said he is bullish about the bond market in the second half of the year as expectations of interest rate cuts grow and may actually come to fruition.
“Buy bonds when prices fall,” he said, but when it comes to stocks, he recommended “selling at the first dip.”
There are many ways to buy government bonds, but investors can also access the bond market by purchasing bond ETFs, such as: iShares Core U.S. Aggregate Bond ETF (NYSE:AGG) and Vanguard Total Bond Market Index Fund ETF (NASDAQ:BND).
real estate
The real estate market has been one of the hardest hit by the recent wave of rising interest rates, as borrowing costs for commercial and private building and renovation have soared.
Hopes of a rate cut could be a lifeline for the sector, which is covered by ETFs such as: Vanguard Real Estate Index Fund ETF (NYSE:VNQ), Schwab US REIT ETF (NYSE:SCHH) and Real Estate Select Sector SPDR Fund (NYSE:XLRE).
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