“Inflation remains the main driver of central banks’ policy actions. We could see more appetite for European bonds as the ECB looks on track to start cutting rates in June.”
- Last week the ECB kept its policy rates unchanged but looks confident that inflation will return to targets gradually.
- In contrast, US inflation is showing some stickiness, but the Fed is likely to reduce rates this year.
- These decisions, among other factors, would affect markets globally, and commodities such as gold.
Macroeconomic data is further signalling divergences across the board. Inflation has again surprised on the upside in the US, where inflation dynamics are more related to the demand side. In Europe, instead, a faster slowdown in prices is materializing. Expectations on the growth front are also diverging. In the US, growth data and sentiment indicators point to a stronger than expected economy, amid resilient consumption. This has led economists to revise upwards growth expectations for the US, while for Europe growth is expected to remain anaemic, with divergences across countries. This growth/ inflation mix will obviously affect policy decisions. The Fed and ECB are likely to reduce rates this year and in doing so they would keep a close eye on inflation.
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