Nothing yet carved in stone – further easing of monetary policy not certain

Fed Chairman Jerome Powell presented the semi-annual monetary policy report to Congress this week. He underlined that the assumptions for expected economic growth remain solid and that the positive labor market report was great news. However, there are crosscurrents such as trade tensions and concerns about global growth that continue to weigh on the US economic outlook. In particular, it appears that the broad global picture (Europe, China) and weak manufacturing, trade and investment are a matter of concern for the Fed, as the associated uncertainty may mean that companies remain reluctant to invest and hire. In particular, the associated subdued inflationary pressures were highlighted by Chairman Powell: "...the Fed needs to try to keep inflation symmetrically at 2%. It is quite important that we fight at 2% and keep inflation expectations up."

So it is primarily concerns over a possible deterioration in the economic outlook due to increased uncertainty (trade conflicts, global events) that overshadow the current relatively solid economic data situation. Both the ECB and Fed are on alert, especially with regard to the subdued inflation outlook. While Powell's firm statement on the symmetrical inflation target has increased the risks of interest rate cuts in the US, the likelihood of interest rate cuts in the Eurozone has recently again reduced.

On the one hand, the downturn in Eurozone industry seems to have found its bottom: industrial production surprised expectations with an increase of +0.9% in May compared to the previous month. On the other hand, ECB Executive Board member Benoit Coeure's comments on inflation made the markets sit up and take notice. Households in the Eurozone seem to be looking to the future with much less skepticism than financial market participants. Household inflation expectations have been more stable since the beginning of the year and are close to a six-year high. In addition, household inflation expectations might have better predictive power and central banks should consider a wider range of inflation expectation indicators than before in order to assess future inflation risks.

The bond markets currently appear to be positioning themselves somewhat more neutrally than recently. Yields in the Eurozone have risen slightly again and, like the central banks, financial market participants will closely monitor the data releases due in the coming weeks and draw their conclusions. Nothing has yet been carved in stone.


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