Fed's July Move Loses Momentum, Focus Shifts to Year-End
Market expectations for Federal Reserve policy have shifted noticeably. According to analysis from BNP Paribas, the robust recent non-farm payrolls data has reduced the immediacy and suspense surrounding a potential rate hike at the July meeting.
A Shift in Data and Market Pricing
This change was evident in market pricing ahead of the July 4th holiday. Short-term interest rate futures implied roughly a 20% chance of a Fed hike at the late-July meeting, down from about 33% prior to the jobs report release. This repricing signals a delay in timing rather than an abandonment of the tightening path.
"The case for Fed rate hikes still holds, in my view, even if the uncertainty is somewhat lower now," noted Chief Economist Isabelle Mateos y Lago. The prevailing market expectation now points to a single 25-basis-point hike this year, with December being the earliest likely timing.
ECB Navigates a More Complex Policy Landscape
Across the Atlantic, the European Central Bank faces its own set of challenges. Mateos y Lago stated that the base case remains an additional rate hike in September. However, a consensus is not guaranteed.
Internal Divergence and External Shocks
"It's worth noting that Governing Council members speaking at the recent Sintra meeting did not rule out skipping this additional hike," she observed, highlighting emerging caution within the ECB.
A significant wild card is the energy sector. She warned that the normalization of energy supplies could take six months or longer to fully materialize. During this period, there is a tangible risk of Eurozone inflation re-accelerating, complicating the policy outlook.
On a somewhat brighter note, she added that outside energy-sensitive sectors and regions, consumer prices in the Eurozone are not currently under broad-based pressure. This suggests inflationary forces may remain targeted rather than widespread.