MacroResearchBoard

ECB: One (Or Two) And Done? – June 3, 2024

A just published report updated our view on how monetary policy is likely to evolve in the euro area and the related investment opportunities over the next 6-12 months.

The ECB is set to reverse course and cut rates next week, based on what is discounted in the forward markets. However, the case for ECB rate cuts is backward looking, as it is based on expectations that the soft economic growth and disinflationary trend of the past year will persist, which is unlikely. We expect only one or two rate cuts (at most) before the rate-cutting window closes on the ECB and forces bond investors to unwind further rate cut expectations.

In turn, we remain underweight euro area government bonds within a global (currency hedged) fixed-income portfolio. We are also favorable on the euro currency in a backdrop where the ECB will cut by less than expected, and regional economic growth is likely to surprise on the upside compared with most other economies, thereby causing investors to revise up their outlook.

In terms of equities, monetary policy will not present a threat for the foreseeable future. This is at a point when the global trade cycle is firming and should provide a further boost for euro area earnings. Consequently, we remain overweight euro area equities within a global equity portfolio.