“Markets are cooling further on the idea of another European Central Bank rate cut. At points starting this week, markets were discounting less than 15bp of additional easing over the next year. More strikingly, and looking slightly further ahead, the 1y1y forward ESTR OIS is less than 4bp below current ESTR fixings. The optimism seems to come on the back of trade agreements being reached with the US, plus the prospects of sizeable fiscal stimulus set to come out of Germany. This has biased the PMIs and, more recently, the German Ifo business outlook higher. These developments have pushed 2y German bond yields within shouting distance of 2% and pre-‘Liberation Day’ ranges again. We struggle to find good reasons for rates to push beyond this level. For all the optimism, we think markets are overlooking the downside risks – be it disinflationary spillovers as the Federal Reserve starts cutting or implementation risks around German spending and reform plans.”
Morten W. Langer
