Carefully Crossing
- 10 June 2025 (10 min read)
KEY POINTS
The level of resistance at the ECB Governing Council against bringing the policy stance into accommodative territory, now that the policy rate has been lowered to 2%, is higher than we expected. That is our main takeaway from last week’s press conference. We note however that the latest forecasts and their long stretches of inflation undershooting leave very little space for additional shocks. We continue to think the ECB will cut deeper, but the burden of proof in terms of dataflow looks heavier. We now think the cuts will coincide with the next forecasts, in September and December, with the depo rate reaching 1.5%, 50 bps higher than in our previous baseline.
Last week’s US Employment Report triggered a flurry of comments, with a debate arising between those who detect there the first proper “cracks” in the US labour market, which should make the Fed re-think its current wait-and -see attitude, and those who continue to think the slowdown is still too elusive to sway the central bank. We err towards the latter. True, some of the details of the report are problematic – we would highlight the reliance on only two sectors, healthcare-social assistance and leisure-hospitality, to provide most of the job creation in May – but this is not (yet?) the smoking gun the Fed needs to move out of its careful attitude. The tariffs are not yet stabilised, and their impact on prices and activity have not yet materialised. More time is needed, despite the pressure from the White House for pre-emptive cuts.
We also try this week to extract ourselves from the “tariffs and budget” diptych which has been dominating the US policy cycle since January by looking at the US energy sector. There, the White House is winning the battle on prices, but this means investment in the US oil and gas industry is stalling, as the Dallas Fed survey suggests. At the same time, the repeal of much of the IRA will hit investment in electrification and renewables. The US “reverse Energiewende” is not contributing to lifting the US overall capital stock.
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