“The macro situation in Europe doesn’t justify a drop in rates”

Investors are paying keen attention to the June meeting of the European Central Bank (ECB) to be held next week, and at which a 25-basis point drop in interest rates is expected to be announced. The question is whether this cut is justified from a macroeconomic point of view…

Inflation doesn’t seem to be slowing down in Germany quite as it should be: prices rose by 2.4% in May - the first increase in inflation since December and two tenths higher than the April and March level.

According to Alberto Matellán, chief economist at MAPFRE Inversión, the good news is that “the market has absorbed that message,” and insists that seeing a slight upturn “isn’t too important – it would be altogether more worrying if it was much higher than expected.” In any case, this persistence of inflation, together with the improvement in growth data we’ve seen in recent quarters, means that the lowering of rates in Europe isn’t justified.

"The macro situation in Europe doesn’t justify rate cuts, certainly not a cycle of them. We have growth, weak as it is, and it’s beginning to improve. There are other nuances, such as financial stability, but looking at the macro data, this isn’t justified," says Matellán.

Meanwhile, in the U.S.A., the inflation rate remains above that of Europe, closer to 3% than the 2% target, so lowering rates across the Atlantic wouldn’t be justified either, especially if the strength shown by the U.S. economy in recent quarters is taken into account.

Optimism in the markets

Ismael García Puente, head of investments and fund selection at MAPFRE Gestión Patrimonial (MGP), points out that the current market scenario is what investors would have wanted at the beginning of the year in terms of equity returns, but not so much with fixed income, which has suffered the most.

Stock markets have managed double-digit gains, and despite the sharp increases in recent months (with the exception of April), Matellán reckons they still have some upside left in them. García Puente explains that the equity strategy is now positioned positively for the medium and long term, including in Asia, Japan and the U.S.A. “That's where we want to have clients invested, in companies that are boosting productivity,” he points out.

The prospects for fixed income could also improve in the coming months. “If we look at how it’s evolved compared to the macro situation, interest rate expectations and investors' optimism, the returns are in reasonable ranges and could rise further,” says Matellán. In fixed income, MGP doesn’t see any asset as a “clear purchase” and, for the time being, it’s beginning to extend the duration of public debt in investment grade to four or five years.

“Now is the moment of truth for central banks to see if the inflation that has pushed us toward interest rate hikes is starting to converge around the 2% target,” says García Puente.