Can The ECB Get Lucky

The ECB is tempering its hawkish stance as inflation data cools and energy shocks fade, suggesting rate hikes will be deferred into 2027. Political uncertainty surrounding French and Italian elections poses ongoing risks to sovereign bond spreads.

Key Takeaways

• 1.Recent downside inflation surprises have eliminated market expectations for back-to-back ECB hikes, making a September hike likely but not guaranteed.
• 2.A less aggressive ECB in 2026 due to fading energy shocks may result in postponed hikes shifting into 2027.
• 3.Upcoming French and Italian electoral cycles in 2027 create political risks for European bond markets, particularly for OATs and BTPs.

Table of Contents

• CAN THE ECB GET LUCKY?
• How long before EA growth “surprises” again?
• Manufacturing turning beyond soft patch?
• Reflation makes hikes easier than supply shocks
• Reflation also makes cost passthrough easier
• Are you ready for the French election?
• Interest expenditure pushing deficits higher

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