Markets are convinced of another ECB cut, but the timing is still uncertain
Market pricing is strongly anchored around an ECB landing zone of 1.75%, but the timing of the next cut remains up for debate. For today’s meeting, a zero probability of a rate cut is priced and this increases to approximately 50% for September. But with the many uncertainties, we doubt markets will get more clarity about the timing during this meeting. Having said that, the eventual cutting date is likely to have little impact on the bigger picture and shouldn't move the needle much on rates.
Trade tensions have resurfaced as a significant uncertainty, with markets becoming more sensitive this week. However, the outlook for an EU trade deal has brightened following Japan's recent agreement and yesterday's news of the EU nearing a similar deal. On the other hand, an escalation with retaliatory measures back and forth can still not be fully discounted. The ECB’s take on the potential tariff risks could therefore be a source of rate moves. A more disconcerting tone could increase the chance of a September cut and have markets reconsider a 1.5% landing zone, as it did just after 'Liberation Day'. On the other hand, with increasing downside inflation risks, from, for instance, a stronger euro, a more optimistic take is unlikely to move rates up by much.
Improving growth outlook could help rates look through trade tensions
But first we’ll have a new series of PMIs coming in, which could factor in markets’ sensitivity to any tariff setbacks. Consensus sees a slight improvement in the eurozone composite index. An uptick, even a minor one, may mean that Trump’s trade tensions have so far done little to hamper the slowly recovering business sentiment. In this case, further delays in the negotiations may not trigger large rate reactions and still open the path to steeper curves. On the other hand, a significantly weaker figure would make markets more nervous and increase the probability of more bullish days ahead.
Thursday's events and market view
PMIs will be today's data highlight. We'll start with France and Germany, followed by the eurozone aggregate indices. For the eurozone numbers, both services and manufacturing are expected to see small improvements, but a composite of 50.7 does not paint a picture of stellar growth. Later in the day, we get numbers from the US and UK, yet here little change is expected. The ECB's expected decision to hold rates won't trigger any surprises, but the press conference could bring some rate volatility if any hints about future moves can be inferred.
In terms of supply, Italy auctions a 2Y BTP and a 6Y BTPei for a total of €4.25bn. The US will auction $21bn of 10Y TIPS.
