Expectations regarding the development of interest rates in the United States and Europe have undergone many changes over the past year. THE roller coaster The one in which they were traveling until now only had one car in which Christine Lagarde and Jerome Powell were. This train accelerated tremendously between October and January, slowed down in the winter and spring, and accelerated again with the heat of summer once both institutions actually began to defuse the price of silver.
However, in recent weeks each has been sitting separately and, with the Federal Reserve clearly moving towards a slower pace, the ECB will step on the accelerator again. So much so that next year, The market expects twice as many rate cuts in the Eurozone (150 points) than in the United States (75).
They both have one last meeting before the end of the year, in December, during which, although at the Fed the surprise would be if there was a decline, At the ECB, the debate is whether the cut will be 25 or 50 pointsaccording to current prices exchanges. So the pace set by this leading indicator is that Lagarde’s team will start the year at 3% and lose 25 points in the first meeting of the year, 50 points in March, another 25 in June and another 25 in september. In total, 150 points less than the reference rate, which will remain within the 1.75%.
On the other side of puddle, The people of Powell will eat the grapes where they are, in the 4.75%. From there, only three drops of 25 points are expected at the meetings in January, May and October, months in which they will arrive at 4% If this happens as expected, widening the rate gap to 2.25 percentage points.
What consequences does this divergence have? One of the main ones is, logically, linked to fixed income securities. The types, directors of movements on the primary and secondary debt market, returned to T-note to the 4.4% zone annual profitability, the highest since July.
Before him, purchases in references from the Old Continent, where pack German A yield of 2.25% is required. The gap between the two sovereign bond assets par excellence has widened and stands above 2.1 percentage points, the maximum reached during the last economic cycle which began in 2020.
This same Friday the revision of German GDP for the third quarter was announced, which remains at a slight growth of 0.1%, or half of that published a few weeks ago. Likewise, Eurozone PMI survey data also sends a clear message of weakness in the community economysuggesting an acceleration of rate cuts, or even the possibility of a reduction giant in December.
From JSS Sustainable AM they point out, on the one hand, that “the latest macroeconomic data in the United States surprised positively and, with Trump’s victory, it is likely that consumer confidence and the business climate will improve in the short term”, so a possible recession has receded. » And on the other hand, “growth in the euro zone remains weak,” he adds. “In the short term, it is likely that the Fed will stick to returning interest rates to a neutral level, so we believe the yield curve should steepen in the months to come,” he continues. “In Europe, the risk of inflation is lower and the ECB is likely to make several rate cuts, so European bonds look more attractive than US bonds and the rate differential is likely to continue to increase,” conclude -they.
“The market suggests that ECB easing over the next year will be double that of the Fed, but in the US there may be a complicated mix between expansionary fiscal policy and a contractionary Fed; “this is why we favor long duration in Europe due to the divergence in growth dynamics and monetary policy expectations,” MFS said. “Diversification should continue to pay off for bond investors; we expect U.S. Treasuries to outperform government bonds by a third and offer returns similar to riskier European investment-grade credit. even taking into account the dollar hedging costs, which are at 1.5%,” they suggest at Generali.
The euro at its lowest level of the year
Another consequence of the large divergence evident between interest rate expectations on both sides of the Atlantic can be seen in the currency market. Investors have started to sell the euro and buy the dollar in this context and the euro is already trading around 1.04 dollars, the level minimum from December 2022.
“The market is reacting to the possibility of Trump implementing his policy agenda as the Fed has reduced the urgency to cut rates while the euro reacts to weak growth on the continent and increased tariff risk after the Republican victory, in addition to the political crisis in Germany”, we underline in Julius Baer.
