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No decision is expected from the ECB this week. Last month Christine Lagarde had hinted at action in June, but of course the Governing Council will have the occasion this Thursday to report on an “interim assessment” of the Euro area’s macroeconomic situation.  The central bank’s decision to revise down its inflation forecast appears to be vindicated by the March print for CPI: disinflation continues at a faster clip than the market expected. The resilience in services prices remains a sore point though. The message from the surveys on firms’ price future price behaviour, and still anaemic domestic demand, are however reassuring for the quantum of inflationary pressure still in the pipeline. It seems the European economy is for now stabilising in low gear. True, acquired speed in nominal wages, contrasting with slower headline inflation, will support purchasing power, but fiscal headwinds are accumulating before the impact of the monetary tightening fades. We continue to think the ECB will not wait until inflation has fully converged to 2% and will cut in June, even if the Fed dithers.

The possibility of a lag between the ECB and the Fed is now the market’s baseline. While we maintain June as our baseline for the first Fed cut as well, it is undeniable that the dataflow is less clearly supportive of a monetary policy reversal in the US than in the Euro area. Job creation remains robust and its re-acceleration since the autumn of last year was confirmed again in the March batch of the payrolls. We note however that pay growth has stabilised at a pace which, assuming current productivity gains are sustained, should be consistent with a return to 2% inflation. Strong supply conditions, driven in particular by large net immigration, are helping. That the recent “Fedspeak” has turned remarkably prudent makes sense, but we still consider Kashkari’s hints last week at “no cut” at all in 2024 as an extreme scenario. That however the ECB cuts before the Fed is absolutely within our “plausibility range”. We note that the Euro exchange rate has barely softened despite a reversal in market expectations on policy rate differentials (still in early February the consensus was for more hikes by the Fed than by the ECB). This should embolden the ECB to take the right decisions for the Euro area irrespective of what the Fed ultimately does.