Rate Outlook Lifts Stocks, Dollar Dips

European shares saw a slight increase in thin trading after a European Central Bank (ECB) official suggested that policymakers might consider consecutive rate cuts starting next month. The Stoxx Europe 600 index experienced a modest rise, led by carmakers and utilities. Trading volume was less than half of the 20-day average for this time of day, with UK and US markets closed for holidays. Meanwhile, American equity futures remained steady, and a dollar gauge dipped.

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Francois Villeroy de Galhau, a member of the ECB Governing Council, indicated that the ECB should not rule out lowering borrowing costs at both its June and July meetings. This stance contrasts with some monetary officials who are uneasy about back-to-back cuts. Chief Economist Philip Lane had previously stated that the central bank would need to keep policy restrictive through 2024, even after a likely rate cut next month.

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While a June rate cut by the ECB has been widely anticipated, the future steps remain uncertain due to variables like wage growth and geopolitical tensions, such as the conflict in the Middle East. This week's data might reveal a slight increase in headline inflation in the eurozone for May.

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“European inflation is back,” noted Credit Agricole SA strategists led by Jean-François Paren in a report. They mentioned that the potential spike in May might be temporary, not challenging the anticipated June cut but adding uncertainty about further cuts later on.

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Among individual European stocks, EFG International AG surged 4.6% following a Bloomberg news report after Friday's market close, which mentioned that Julius Baer Group Ltd. is considering acquiring the rival Swiss private bank. Conversely, Julius Baer shares dipped 0.8%.

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In Asia, the MSCI Asia Pacific index recorded its most significant gain since May 16, with notable advances in Hong Kong, China, and Japan.

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This week, traders are awaiting a series of inflation reports from Australia, Japan, the eurozone, and the US to fine-tune their monetary policy expectations. The Federal Reserve’s preferred measure of underlying inflation is due on Friday and is anticipated to show modest relief. Fed Chair Jerome Powell has emphasized the necessity for more evidence that inflation is heading towards the 2% target before considering easing policy.

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Several US central bankers, including John Williams, Lisa Cook, Neel Kashkari, and Lorie Logan, are scheduled to speak this week.

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Trading in cash Treasuries was paused due to the holiday. When traders return from the long weekend, they will encounter the new “T+1” rule, which mandates that US equities settle in one day instead of two, potentially causing complications for overseas investors.

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Elsewhere, gold prices rose, while copper futures declined. Oil prices increased after experiencing their largest weekly drop in four weeks, with attention now on an OPEC+ supply meeting on Sunday and US demand as the summer driving season begins.

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