Markets Aren’t Looking for Rates to Come Down Before 2028
Source: Macrobond, ING
This is where we disagree.
Yes, the ECB may well hike again this summer. But the bigger story is that across the US, Europe and Britain, we think rates are more likely to be lower, not higher, in 12–18 months’ time.
Take the US. The Fed’s rapid shift rests on three arguments: a jobs market rebound despite lower immigration, inflation at 4% and above target for five years, and a growing sense that policy may not be especially restrictive after all.
But there are holes in each of those arguments.
The jobs market recovery looks less impressive when you exclude private health/social care and hospitality. Those sectors account for only a quarter of jobs, but two thirds of jobs growth so far this year. Yes, hiring has improved elsewhere, but not nearly as rapidly as the headline figures imply. And crucially, there’s very little sign that this improvement is feeding into broader wage pressure.
The Rebound in US Jobs Isn’t Quite as Strong as You Think
Source: Macrobond, ING
That’s one reason why inflation fears should start to recede as the year goes on. Another is housing. Kevin Warsh himself acknowledged this week that policy still looks restrictive when you look at what’s happening there. And as James Knightley argues in his excellent piece today, rents are barely rising – something that should increasingly pull core CPI lower given housing’s huge weight in the index.
Add lower fuel prices, a reversal of recent airfare spikes, and the fading impact of tariffs, and the case for rate hikes looks much less compelling.
Europe, in many ways, looks similar. ECB policymakers are increasingly talking tough about “second-round effects”. Christine Lagarde said this week she’s beginning to see signs of them.
Message received: the ECB wants to hike again this summer. But is it actually happening?
Food inflation fell sharply in May, not just in the eurozone, but in the UK and in parts of Eastern Europe, too. If you were looking for early signs that something was happening to inflation away from the obvious fuel-intensive categories, this would be an obvious place to find them.
Admittedly, it’s still very early days and, contrary to Lagarde’s comments, much too early to conclude anything about second round effects.
But by next winter, we should have a decent sense. Carsten Brzeski reminded me this week that January matters a lot because that’s when we start to see lots of annual price resets coming through. And by the first quarter of next year, we should have a much clearer sense of whether energy costs are feeding into pay negotiations and stickier inflation categories.
And if they aren’t? Then today’s “insurance” hikes (another banned phrase!) may start to look unnecessary. Policymakers could start to conclude that insurance is no longer worth paying for.
For those of us in the UK, we’ve seen this movie before.
Almost exactly a year ago, Bank of England hawks were sounding the alarm about rising food prices, rising employer taxes and a jump in the minimum wage. Policy easing was slowed down.
Yet by February, those fears had largely evaporated. The doves declared victory, BoE analysis concluded the risk of second-round effects had faded. And the latest data on prices and wages bears that out. Absent the Iran war, there was a growing case for getting a move on with… you know what.
That may prove a useful guide for what happens elsewhere over the next year.
Which brings us back to markets. Right now, investors think rates are heading – and staying – higher. We suspect that by this time next year, central banks will be quietly preparing to explain why they’re going lower.
And if I’m wrong, then don’t be surprised if this column just becomes me, the banished frog, croaking away beside a Frankfurt pond…
Think Ahead in Developed Markets
United States
- Market rate hike expectations jumped on the hawkish pivot from the Federal Reserve. We recognise that the Fed has missed its target for the past five years and Kevin Warsh wants to bring this to an end. Nonetheless, the inflation backdrop should improve markedly over the next 12 months and questions remain over how robust the jobs market actually is. Significantly, half the FOMC don’t think the Fed needs to hike, and we agree with them. A lengthy pause is our call.
- May Core PCE (Thu): Next week we are likely to hear from a few Fed officials, despite Warsh stating that the Fed talks too much. In terms of the data, the highlight will be the personal income and spending report. were decent and that should be reflected in good consumer spending numbers, but with incomes lagging, we may see a further drop in the savings rate. We are getting close to all-time lows, which hints at stress for many consumers. Meanwhile, the Fed’s favoured measure of inflation, the deflator, is expected to come in at around 0.3% month-on-month based on and metrics already released. We suggest the balance of risks signal a 0.2% outcome would be more likely than a 0.4% print.
Eurozone
- Jun Consumer Confidence (Mon): For the eurozone, all eyes will be on confidence indicators next week. With consumer confidence out on Monday, we’ll get a sense of how the prolonged uncertainty around the Middle East situation and higher is playing out in June. Don’t expect the deal to be fully included in the numbers yet, so this may understate sentiment, perhaps.
- Jun PMI (Tue): For the , the concern for May was that data came in rather downbeat. The question is whether June has seen some recovery already, or whether growth concerns are increasing. With growth around the zero line, a technical recession is never far away for the eurozone. The PMI will give more insights into whether the energy crisis has had a more negative economic impact again in June.
Think Ahead in Central and Eastern Europe
Hungary
- Rate Decision (Tue): An intriguing rate decision by the National Bank of Hungary is approaching. Official communication has suggested a cautious rate cut in June, meaning a 25bp move down to 6.00%. However, given that the forint has reached a five-year high against major currencies, government bond yields have fallen to levels not seen since early 2022 and the risk premium on German Bunds has dropped to the lowest percentile of historical spreads, a bolder move is warranted. Nevertheless, until we hear decision-makers openly discussing the option of cutting rates by 50bp, we pencil in a 25bp move. In our view, an outsized cut would be easily justified based on market pricing and for economic structural reasons, especially if the US-Iran deal remains in place until the rate decision is announced.
Czech Republic
- Jun Confidence (Wed): Both business and consumer sentiment are likely to record a marginal improvement in June on the back of the recent Hormuz negotiations and reduced tension, which imply lower oil prices. Domestic fuel prices eased tangibly in June, which should contribute to a halt in the deterioration of consumer sentiment. Hopes for a more sustainable resolution of the conflict will be supportive of business sentiment when it comes to future expectations.
CIS
- Rate Decision (Wed): We expect the Central Bank of Azerbaijan to hold the refinancing rate at 6.50% at the upcoming meeting on 24 June. Compared to the previous meeting, the inflation rate picked up slightly to 5.8% YoY, with increased pressure seen in all the major segments – food, non-food, and services. Meanwhile, with inflation still within the upper bound of the 4±2% target range and the balance of inflationary risks largely unchanged, there should be little urgency to adjust the monetary policy stance.
Key Events in Developed Markets Next Week
Source: Refinitiv, ING
Key Events in Central and Eastern Europe Next Week
Source: Refinitiv, ING
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