Archive

ECB: Watching the Good Place

• The ECB kept its description of the policy setting as in a good place, and wants to watch the news in the next few months. Lagarde refused to emphasise September’s meeting.
• Euro strength is depressing inflation below target in the near-term forecasts, but the ECB remains relaxed about this. It sees the outlook as broadly unchanged since June.
• We still see rolling resilience in the economy and doubt US trade policy will break it. More rate cuts are inappropriate without demand destruction, so we don’t expect any.

By Philip Rush

Inconsistently Dovish Pricing

• Dovish market fears from April have unwound for the Fed, yet deepened for the BoE, despite broadly resilient data and cautious guidance from policymakers reluctant to cut.
• Equity prices have relied on this resilience to recover, yet expectations for extended rate-cutting cycles imply it breaks. Payrolls only forced half of the gap to close.
• We expect ongoing resilience to keep rolling market pricing for rate cuts later, with the unnecessary easing ultimately never being delivered by the BoE, Fed, or ECB.

By Philip Rush

HEM: Rolling Resilience

• Activity remains resilient, and labour markets are tight
• Underlying price and wage inflation mostly track >2%
• Doves assume this regime breaks, but it isn’t happening
• Cuts can keep rolling later and may never materialise
• Rate hikes are more historically usual after pausing

ECB Still Squeezed By Unemployment

• EA unemployment’s rise to 6.3% matched the ECB forecast underlying recent hawkish guidance and narrowly relied on Italy, which offset a broad tightening elsewhere.
• Unemployment is still broadly lower than a year ago and pre-pandemic. That will not help a disinflationary move along the Phillips Curve, let alone shift it lower.
• Without a disinflationary surprise, the ECB should not be shocked into a rate cut as it describes the prevailing setting as well-positioned. We still see no more ECB cuts.

By Philip Rush