The year 2025 has begun with a new delay in the prospects for interest rate cuts in the euro zone. At the end of 2024, the markets were clear that the European Central Bank would cut rates 5 times in 2025, with drops of 25 basis points each time, until completing a total cut of 125 basis points and leaving the deposit facility at 1. 75%. The latest inflation data in the euro zone has once again shown a rebound, but it was expected, and now the market seems to be focusing more on the latest consumer survey launched by the ECB, which reflects an increase in inflation expectations in the future.
As happened in 2024, in the early stages of the year the markets have begun to moderate their expectations of seeing rate cuts this year. Investors have erased a rate cut by the ECB in their roadmap for 2025, and now only expect there to be 4 drops of 25 basis points in the price of money so far this year. Markets now discount that rates will bottom out between June and Julyalthough they lean slightly towards the first option. The rate floor will hit 2%, 25 basis points above what was expected until the beginning of the year.
The latest inflation data in the euro zone has confirmed a new rise in prices during the month of December, but this is an expected figure for the entire union, although in Germany and Spain the data has been higher than what analysts expected. However, this Tuesday the ECB published the results of its latest consumer survey, and the responses they received confirm the need to take the rate cut slowly by the central bank.
As published by the central bank, “the average expectation for inflation in the next 12 months has increased for the second consecutive month, to 2.6%, compared to the expected 2.5%”a fact that may be weighing on investors’ expectations of seeing rate cuts in the coming months. Furthermore, this consumer trend is not limited to the short term: “inflation expectations over the horizon of the next 3 years have also increased, up to 2.4% in November, the highest level seen since July 2024”, indicate from the central bank.
With the photograph of rate expectations in 2025 already complete, everything indicates that the decreases will accumulate at the beginning of the year, with four consecutive cuts, in the opinion of investors. However, if macroeconomic data continue to be published confirming the strength of inflation, it is likely that the roadmap anticipated by the markets will change again.
The American bond hits 4.7% due to the ‘macro’ strength of the US
The outlook for stronger inflation and a central bank that will find it difficult to carry out aggressive rate cuts is not exclusive to the euro zone. The macroeconomic data published this Tuesday in the United States is reflecting stronger-than-expected strength in the world’s leading economy, and this has led investors to discount fewer rate cuts by the Federal Reserve this year. Consequently, The US bond has reacted with rapid sales that have skyrocketed its yield to maturity to almost 4.7%, a new high not seen since April of last year.
Both the JOLTS employment data and the ISM activity survey for the services sector are stronger than expected. Job vacancies have increased to 4.8%, compared to the expected 4.6%, and the activity expectation data for the services sector has increased more than expected, up to 54.1 points.
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