From Morningstar: 2024-10-17 20:31:00

The European Central Bank cut the deposit facility rate by 25 basis points, with markets now expecting another cut in December. Economists are evaluating the impact on inflation, weaker growth in countries like Germany, and the fixed-income markets. Debate continues on whether back-to-back rate cuts are necessary or if a data-dependent approach should guide decisions.

Some experts, such as Seema Shah, advocate for further rate cuts, citing inflationary pressures and the troubling state of the euro area economy. Others, like Ulrike Kastens, expect significant rate cuts in the coming months as the debate over the economy’s weakness gains momentum. The data-dependent approach taken by the ECB is likely to continue in the near term.

In light of the current disinflation and increasing risks to economic growth, markets are preparing for different scenarios, including a possible stagflation. Pablo Duarte warns that while the ECB is pursuing a deflationary stance, inflationary risks remain due to increasing money supply and lower rates encouraging credit growth.

Eurozone inflation dropped to 1.7% in September, down from 2.2% in August 2024. Economists like John Butler believe that inflation expectations are too low, with higher energy prices potentially pushing headline inflation higher in the short term. Economic growth concerns persist, with predictions for a standstill in the fourth quarter.

Experts are closely watching Germany’s recession and its impact on fixed-income markets. Despite concerns over the German economy, the rest of the euro area remains resilient. The ECB’s rate cut is seen as a transition from gradual to sequential cuts, with markets anticipating yield curve steepening trends and potential divergence between the eurozone and US economy.

In the fixed-income markets, projections suggest that bond yields may be influenced by the ECB’s rate cuts and the divergence between the eurozone and US economies. Some sectors, such as real estate and public utilities, could benefit more than others from falling rates. Overall, the outlook for euro investment grade bonds remains positive based on recent trends.



Read more at Morningstar: Disinflation, Rates, and Recession: What Next for…