Hike to Wait and See

The ECB raised rates by 25bp and signaled a gradual path, with a likely pause in July before a final hike in September. Morgan Stanley maintains a long position in specific rate flatteners given market pricing.

Key Takeaways

• 1.The ECB implemented a 25bp rate hike and is expected to pause in July, with a final hike anticipated in September.
• 2.June macroeconomic projections show lower growth and higher inflation for 2026-2027, with stickier inflation expected in 2027.
• 3.The European banking sector remains attractive with an estimated 2-5% earnings upside due to resilient loan growth and higher rates.

Table of Contents

• Monetary Policy: Gradual Path Ahead
• June Projections: Stickier 2027 Inflation, Resilient Growth (with some caveats) and Three Scenarios
• Rates Strategy: First Do No Harm
• Valuation Methodology and Risks

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