European Central Bank
After the sharp falls in eurozone inflation recently, a series of rate cuts this year by the European Central Bank is now the consensus view. However, monetary policy transmission takes time and we don’t think growth will receive much of a boost from monetary loosening until 2025, though there’s potential for some upside surprises.
Our measure of financial conditions has become less restrictive in the US and started to loosen in the eurozone and the UK, reflecting investors’ expectations that interest rates have peaked. This should aid the outlook for commercial real estate (CRE) on the margins, although the scale of past rate hikes, sluggish economies, and structural headwinds mean the sector still confronts challenging fundamentals.
Recent European valuations data from MSCI for Q2 confirmed that capital values are still falling, but at a slower pace than they were last winter. This raises the question as to whether we have reached a turning point in this downturn? Do we expect capital values to start their recovery imminently, or is it still too soon to claim that we are now out of the woods?
We expect eurozone inflation will fall below the European Central Bank’s target in H2 2024. This is one of our key out-of-consensus views that puts us below the ECB’s forecast. Our call relies primarily on more pronounced disinflation from consumer energy and food prices than the ECB assumes. We anticipate a stronger slowdown in core inflation, given our weaker growth outlook.
As term premia reprice higher, a modest increase in duration is warranted, however, we think the opportunities lie at the end short end of the curve.
In this week’s Beyond the Headlines, join Javier Corominas, Director of Global Strategy, to look at the why ECB pricing and eurozone yield curves may be mispriced.
Most measures of inflation expectations eased in recent months, with the notable exceptions not as bad as they look. This improvement alleviates concerns about possible second-round effects or an unanchoring of inflation expectations, making it easier for the European Central Bank to bring actual inflation back to its 2% target. This will also facilitate a gradual return from the ECB to a more traditional reaction function after a period where taming high inflation was the sole focus.