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ECB cuts euro zone rates for first time since 2019

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World stocks on cusp of fresh record high

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Nvidia ( NVDA ) overtakes Apple as world's second most valuable

firm

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Graphic: World FX rates http://tmsnrt.rs/2egbfVh

By Marc Jones

LONDON, June 6 (Reuters) - World stocks were on the

brink of an all-time high and the euro rose on Thursday after

the European Central Bank cut interest rates for the first time

in nearly five years, but also signalled that follow-up moves

could take a while.

ECB policymakers duly delivered their widely-flagged quarter

point cut to 3.75%, but markets were left feeling a little

deflated after the bank also said it now did not expect

inflation to fall back to target until 2026.

It was enough to snip the pan-European STOXX 600's

gains in half to a more modest 0.4%, while the euro inched up to

almost $1.0890 against the dollar and government bond yields -

which reflect borrowing costs and move inverse to price - ticked

up too.

MSCI's 47-country main world index also

backpedaled slightly, having been within a single point of a

seemingly inevitable new peak, and record high Wall Street

prices also flickered red in the futures markets.

"The focus for markets (now) is whether they will find room

to cut in September," Saltmarsh Economics' Marchel Alexandrovich

said.

He said it wasn't a surprise that inflation forecasts had

been revised up. "Inflation is proving sticky and that makes it

difficult."

Sentiment beforehand had almost reached frenzy stage again.

Wall Street's S&P 500 and Nasdaq had both set records on

Wednesday after a now $3-trillion AI juggernaut Nvidia ( NVDA )

swept past Apple to become the world's second most

valuable company, behind Microsoft ( MSFT ).

The euro's gain added to its 2% rise over the last month to

reach just shy of $1.0880, although most traders were sitting on

their hands, with President Christine Lagarde stressing at the

start of her post-meeting press conference: "We are not

precommitting to a particular rate path".

All 82 economists polled by Reuters had expected the

Frankfurt-based central bank to trim its key rate from the

record high 4.0% level it has been at since September, but what

it does now is clearly a subject of much debate.

EU elections happen in the coming days and

stronger-than-expected data over the last few weeks, plus

Thursday's increase in the ECB's in-house inflation forecasts,

have raised doubts about how many more cuts will be justified

this year.

Euro zone inflation rose more than predicted in May, fueled

by price growth in the services sector, which some policymakers

single out as especially relevant because it reflects domestic

demand.

This was likely to mirror larger-than-expected increases in

wages in the first quarter of the year, which boosted consumers'

battered disposable income after years of below-inflation pay

hikes.

"This was a cautious cut," Samuel Zief, head of global FX

strategy at J.P. Morgan Private Bank said. "We currently think

that September could be next. But (there is) no reason to expect

significant reductions any time soon with growth actually

picking up steam of late."

GOLDILOCKS STORY

The Bank of Canada pipped the ECB to being the first G7

country to cut rates in this cycle on Wednesday. The U.S.

Federal Reserve meets next week, although is not expected to

move until September.

By contrast, the debate at the Bank of Japan, which meets

the week after, will be on if, and when, to raise rates.

Canada's dollar trimmed some of the losses from its

post-cut dip on Thursday to leave it at C$1.37 per U.S. dollar.

In the bond markets, Germany's 2-year government bond yield

, which is sensitive to policy rate expectations, was

up nearly 6 bp at 3.033%. It hit 3.125% on Friday last week, its

highest since mid-November.

Benchmark 10-year U.S. Treasury yields were a touch higher

at just over 4%, although that was still near their lowest in

two months, after data this week hinted that the U.S. labour

market is finally cooling.

That included private U.S. payrolls on Wednesday and a

report on Tuesday that showed job openings fell in April to the

lowest in more than three years.

Markets are now pricing nearly two quarter-point Fed cuts

again this year, with a September move seen as a 68% chance

compared to 47.5% last week.

"We're still in the Goldilocks range, so bad economic news

has been good for equities, as Fed rate cuts are back on the

table," said Ben Bennett, Asia-Pacific investment strategist at

Legal and General Investment Management.

Investor attention will soon turn to the U.S. nonfarm

payroll report for May on Friday, with a Reuters poll of

economists expecting it to have risen by 185,000 jobs.

"We need that to be around 100-150k to maintain the

Goldilocks narrative," Bennett said. "Much higher than that and

yields could move back up, but if we get zero or negative, then

we could be talking about a hard landing again."

In commodities, Brent crude futures rose as much as

0.5% to $78.50 a barrel, while U.S. West Texas Intermediate

crude futures rose 0.4% to $74.19.

Gold barely budged at $2,360 per ounce after a 1%

rise previously, while cryptocurrency bitcoin was shuffling back

towards March's record high again at $70,985.