Markets are reacting to the ECB's interest rate decisions

Dow was up 49 but off early highs, decliners ahead of advancers 5-4 & NAZ slid back 28.  The MLP index hardly budged in the 287s & the REIT index was flat at 375.  Junk bond funds were steady & Treasuries had limited selling, allowing rates to inch higher (much more below).  Oil rose in the 74s & gold gained 11 to 2387.

Dow Jones Industrials 

Treasury yields ticked up as investors considered the latest economic data & weighed the outlook for interest rate cuts.  The yield on the 10-year Treasury was up by less than 3 basis points at 4.302% & the 2-year Treasury yield was last 2.5 basis points higher on the day at 4.75%.  Yields & prices move in opposite directions & 1 basis point is equivalent to 0.01%.  The European Central Bank announced its first interest rate cut since 2019, even as inflationary pressures in the euro zone have lingered.  The move will likely increase the pressure on the Federal Reserve to follow suit & walk back monetary policy that investors view as too restrictive.  The Federal Reserve is due to meet next week, but rate cuts in the US are not expected to begin until later in the year.  Canada became the first country in the Group of Seven to cut interest rates in the current cycle yesterday, following cuts from central banks in Sweden & Switzerland earlier in the year.  Investors also weighed data that provided fresh clues about the state of the economy.  ISM's purchasing managers index for the services sector, released yesterday, rose to 53.8 in May, above the previously expected 50.7.  Readings above 50 indicate an expansion of the sector.

Treasury yields rise slightly as investors weigh economic data, rate outlook

Euro zone government bond yields extended gains today, shortly after the European Central Bank (ECB) announced its first interest rate cut in 5 years.  Germany's 10-year bond yield, seen as the euro area benchmark, was up 6 basis points to 2.557% & the country's 2-year bond yield was higher by 4 basis points to 3.025%.  Italy's 10-year bond yield was up 7 basis points to 3.88%, while the yield of the Spanish bond of the same maturity added 6 basis points to 3.29%.  While the ECB delivered a first rate since 2019, market watchers were quick to speak of uncertainty over what happens next.  “The Governing Council emphasized a data-dependent, meeting-by-meeting approach, reducing the likelihood of a back-to-back rate cut in July due to insufficient European data before the next meeting. This decision can be termed a ‘hawkish cut’,” Gaël Fichan, head of fixed income at Bank Syz, said.  US Treasuries were higher as investors monitored a rise in weekly jobless claims, potentially supportive of Federal Reserve rate cuts, with the benchmark 10-year edging slightly higher to 4.299%.  Interest rate divergence is likely to drive action in stocks, currencies & bonds in the coming months, according to analysts.

Euro zone bond yields rise after European Central Bank delivers ‘hawkish’ cut

Crude oil futures rose for a 2nd day as the ECB cut interest rates for the first time in 5 years & as traders bet the Federal Reserve will follow suit in Sep.  Oil prices closed more than 1% higher on yesterday, snapping a losing streak triggered this week by the OPEC+ decision to increase supply later this year.  The move higher yesterday came after private payrolls came in much weaker than expected, boosting hopes that the Fed will slash rates.  Fed futures trading now suggests about a 70% chance that the central bank will cut rates in Sep.  Lower interest rates bring the hope of more robust economic growth & stronger oil demand.  “The May private payroll data yesterday also suggested a slowing labour market much to the delight of the Federal Reserve,” Tamas Varga, an analyst at oil broker PVM, wrote.  “US equities climbed to fresh historic highs and the temptation was irresistible for oil, it faithfully followed.”  Oil prices are still down about 3% this week after 8 OPEC+ members led by Saudi Arabia & Russia agreed to phase out 2.2M barrels per day in production cuts from Oct thru Sep 2025.  Saudi Arabia & Russia may be willing to maintain their cuts thru the end of the year if demand isn't strong enough to absorb the additional barrels.  Moreover, rising oil inventories are expected to shift to draws in the 3rd qtr with the OPEC+ cuts remaining in place at least until Oct.

Oil prices gain for second day as ECB cuts rates, traders hope for Fed to ease in September

Dow had a good advance at the opening, then selling took much of that gain away.  Meanwhile NAZ has been little changed.  Traders are weighing how these changes (above) might affect policy makers at the Fed meeting next week.