Looking at economic data in July, the divergence in growth performance between the US and Europe has increased further. A good indication of the different trends in macro data is given by the Citigroup Economic Surprise Index.
It shows clear negative momentum in the Eurozone, but at the same time positive developments in the US – a divergence that could affect market expectations of future monetary policy decisions. Interestingly, markets are currently only pricing one more hike by the ECB in September and only a 40% chance of another hike by the Fed for the rest of the year. Therefore, the peak rates narrative has gained momentum, as investors hope that central bank tightening will end soon and government bond yields have finally reached their peaks. Even though we share the view that inflation pressures should ease further over the medium term, it is too early to celebrate victory on the inflation front. Unemployment rates in Europe and the US remain at multi-decade lows and core inflation is still running high. There is therefore a decent chance that the Fed will have to hike further as US growth remains robust and inflation sticky.