European stock markets are rallying this morning, as traders anticipate a cut to eurozone interest rates at lunchtime.

Germany’s DAX index has gained 0.8% in early trading, while France’s CAC is 0.3% higher, and both Spain’s IBEX and Italy’s FTSE MIB are up 0.15%.

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, says:

There’s renewed optimism that the ECB will cut interest rates in its decision later today, which is adding additional enthusiasm into equities.

The lingering question, however, is what the interest rate roadmap looks like after June. Even if a cut arrives today, markets will be more interested in understanding expectations for the rest of the year.

The British Chambers of Commerce (BCC) has upgraded its expectations of UK economic growth for this year and 2025 – but the new forecasts can hardly be called ‘gangbusters’.

The BCC says the economy has made a stronger start to this year than expected. So growth for 2024 and 2025 has been revised upwards to 0.8% and 1.0% respectively.

However, 2026’s growth forecast is unchanged, at 1.0%, with the BCC warning that “a poor outlook for exports” is dragging on growth, while high interest rates continue to limit investment.

Vicky Pryce, who chairs the BCC economic advisory council, said:

“The BCC’s latest forecast shows there is life in the UK economy but if it is to gain momentum then it must be nurtured.

“With interest rates expected to be cut at a modest pace and pay outstripping inflation, businesses will be holding onto much of their money – even as confidence rises after the mini-recession.

“As we enter the final weeks of the general election campaign, businesses will be watching for politicians to show they have sustainable long term economic plans.

“These must play to the UK’s strengths and give companies confidence.”

UK statistics watchdog to investigate Sunak’s use of term ‘economy going gangbusters’

Phillip Inman

The UK’s statistics watchdog has opened an investigation into remarks made by Rishi Sunak about the economy “going gangbusters” amid concerns that politicians could misuse economic data in the run-up to the election.

Sir Robert Chote, chair of the UK Statistics Authority, will examine whether the prime minister repeated comments that were “taken out of context” and exaggerated the Conservative party’s economic record.

The phrase “going gangbusters” was used by an official at the Office for National Statistics (ONS) during a briefing about the economy with journalists before becoming the basis of a Daily Mail front page story last month. A week later Sunak, in an interview on the Radio 4 Today programme, repeated the term.

More here….

Back in the eurozone, German factories have suffered another drop in orders.

German industrial orders dropped by 0.2% in April, missing expectations of a rise of 0.6%. That’s the fourth monthly drop in a row.

It indicates that manufacturing in Europe’s largest economy hasn’t made a strong start to 2024; perhaps a cut to interest rates might help…

The decline was due to a drop in large-scale orders in April.

That included a 15.4% decline in demand for ‘other transport equipment’ such as aircraft, ships, trains.

There was aso a 5.1% drop in the manufacture of computer, electronic and optical products, while electrical equipment orders fell 4.1%, and the manufacture of machinery and equipment dropped by 1.5%.

In a third AI development this morning, the Federal Trade Commission is investigating whether Microsoft deliberately structured a takeover deal to avoid a government antitrust review.

The transaction in question involved AI startup Inflection. In March, Microsoft announced an unusual licening deal in which it paid $650m to use Inflections models and hired most of its staff, including its co-founders.

The FTC is concerned that this allowed Microsoft to swerve a rule that acquisitions valued at more than $119m must be reported to to federal antitrust-enforcement agencies, who could choose to investigate the impact on competition.

The WSJ says:

The FTC is now drilling down on Microsoft’s deal with Inflection, seeking information about how and why they negotiated their partnership, according to a person familiar with the matter and records viewed by The Wall Street Journal.

Civil subpoenas the commission sent recently to Microsoft and Inflection seek documents going back about two years. The agency is trying to determine whether Microsoft crafted a deal that would give it control of Inflection but also dodge FTC review of the transaction, the person said.

If the agency finds that Microsoft should have reported and sought government review of its deal with Inflection, the FTC could bring an enforcement action against Microsoft. Officials could ask a court to fine Microsoft and suspend the transaction while the FTC conducts a full-scale investigation of the deal’s impact on competition.

UK authorities are also interested in the deal. In April, the Competitions and Markets Authority announced an investigation into Microsoft’s “hiring of certain former employees of Inflection AI” and “its entry into associated arrangements with Inflection AI”….

Elsewhere this morning, the top US antitrust enforcer has pledged to look “with urgency” at the artificial intelligence sector.

Jonathan Kanter has told the Financial Times about his concerns that power over the transformative technology is being concentrated among a few deep-pocketed players.

Kantar cited “monopoly choke points and the competitive landscape” in AI, such as thecomputing power and the data used to train large language models, to cloud service providers, engineering talent and access to essential hardware such as graphics processing unit chips (where Nvidia has such power).

The FT explains:

Regulators are concerned that the nascent AI sector is “at the high-water mark of competition, not the floor” and must act “with urgency” to ensure that already dominant tech companies do not control the market, Kanter said.

Sometimes the most meaningful intervention is when the intervention is in real time,” he added. “The beauty of that is you can be less invasive.”

Some of the biggest players in the artificial intelligence field are facing the prospect of an antitrust investigation.

US regulators have cleared the way for antitrust inquiries into Nvidia, Microsoft and OpenAI, according to reports this morning, as they intensify their scrutiny of AI.

The New York Times reports that the US Justice Department and the Federal Trade Commission have reached a deal to split responsibility for investigating the three major players in AI.

Once completed, probably in the coming days, the deal will mean the DoJ will take the lead investigating Nvidia, whose chips are driving the AI revolution, and whose market capitalisation hit $3trn last night.

This leaves the FTC with the task of examining OpenAI, maker of the ChatGPT chatbot, which has received billions of dollars of investment and support from Microsoft, which owns 49% of its shares.

Nvidia, OpenAI and Microsoft are in the spotligh due to concerns over their dominance of the AI space, and worries that. artificial intelligence will cost millions of jobs, and that safety oversight within the industry is weak.

The move shows that the AI industry faces growing regulatory scrutiny.

Back in January, the FTC launched an inquiry on Thursday into investments and partnerships made by some of the biggest companies in the generative artificial intelligence space.

Just last week, US antitrust chief Jonathan Kanter told a conference that there are structures and trends in AI that should give us pause’”.

Kanter, the assistant attorney general for the antitrust division at the Department of Justice, explained:

AI relies on massive amounts of data and computing power, which can give already-dominant firms a substantial advantage.

Powerful network effects may enable dominant firms to control these new markets, and existing power in the digital economy may create a powerful incentive to control emerging innovations that will not only impact our economy, but the health and well-being of our society and free expression.

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

The European Central Bank is poised to join a select group today, by lowering borrowing costs across the eurozone.

Following heavy hints in recent weeks, economists widely agree that the ECB will vote to lower its key interest rates at a governing council meeting in Frankfurt today.

A cut makes sense, as inflation across the eurozone has cooled this year – to 2.6% in May. It would start to unwind a tightening cycle that began in summer 2022, and which has pushed the ECB’s deposit rate to a record high.

The decision comes at 1.15pm UK time; the money markets this morning show that a rate cut is a 92% probability, with just 8% chance of no change.

If that’s accurate, the ECB would join Sweden and Switzerland, who lowered their interest rates in recent months, and Canada, which yesterday became the first G7 country to cut rates in this cycle.

It would mean, unusually, the ECB easing policy before the US Federal Reserve.

Economists and traders are also looking for hints as to how quickly the ECB might continue to ease policy in the coming months.

Inflation actually rose in May, up from 2.4% in April, which has created some uncertainty over whether underlying price pressures have been subdued.

Henk Potts, market strategist at Barclays Private Bank, commented:

“After nine months of keeping rates on hold, we expect the European Central Bank to embark on a rate-cutting cycle at its meeting on Thursday, 6 June. A quarter-point reduction across its policy rates, the first cut since 2019, is anticipated.

Our view is that the Governing Council’s rationale will likely be driven by a stronger-than-expected recovery in activity and increased confidence that inflation will return to the targeted level. Beyond the June meeting, we forecast that we could see quarter-point cuts in September and December. In addition, we expect to see 75 basis points of cuts next year, with the deposit rate finishing 2025 at 2.5%.”

Analysts at Deutsche Bank told clients that the question is, “what comes after June?”, adding:

The cut will set the new direction for policy but with economic momentum outperforming expectations and domestic inflation proving sticky in 2024, the ECB can afford to take things slowly and let the data set the parameters of the easing cycle.

The agenda

• 9.30am BST: UK construction PMI report for May

• 9.30am BST: UK economic activity and business insights data

• 1.15pm BST: European Central Bank interest rate decision

• 1.30pm BST: US weekly jobless claims

• 1.30pm BST: US trade balance for April

• 1.45pm BTS: European Central Bank press conference