ECB Tightening Offset by Fed Downturn, Stagflation Risks Looming
The European Central Bank's (ECB) tightening has been partially offset by the lack of further Federal Reserve (Fed) tightening, which has eased global financial conditions.
This is according to Geoff Yu at BNY, who notes that falling prices for dollar-priced commodities will generate some negative pass-through on margins until there is clear visibility over the conflict.
As a result, rates markets are unlikely to remove the near 45bp currently priced in additional tightening by year-end, and BNY favors adding to received positions in European rates to alleviate financial conditions on the margins.
The European inflation situation remains distinct from that of the U.S., where there is a stronger demand case led by investment growth. However, based on Eurozone PMI details, the fundamentals behind services recovery do not bode well for a sustainable demand lift.