ECB Hikes Likely Amid Resilient Eurozone Growth
The European economy is experiencing a resilient growth environment, but the energy shock from six months ago has still not generated any indirect effects or second-round effects on core inflation. In France and Spain, inflation rose broadly as expected to 2.7% y/y and 4.5% y/y respectively, driven by higher energy prices, particularly motor fuels. However, underlying inflation remained subdued, with core inflation declining in both countries.
The European Central Bank (ECB) is likely to hike rates by 25bp in September, but deliver no further hikes compared to market pricing of almost one additional increase thereafter. The ECB also no longer expects to cut the deposit rate back to 2.00% in 2027 due to the resilient growth environment.
In the US, headline PCE inflation was slightly above expectations at 3.7% y/y in July, while core PCE matched expectations at 3.3% y/y and 0.2% m/m. The stronger details combined with slightly higher inflation pushed yields higher across the curve and EUR/USD lower.
In Germany, the Ifo index rose more than expected in August, indicating a clear German recovery led particularly by manufacturing. Next week brings several tier-one releases, including the US jobs report, euro area flash inflation, and Chinese PMIs.