Steno Signals #122 – Markets have abandoned the cutting narrative (outside of EZ)

Morning from Copenhagen,
I spent my Sunday evening in the company of Interpol (the band, not the police, doh!), allowing myself a day off for once after the big announcements we made last week. As a result, Steno Signals was released this Monday morning instead.
The recent repricing of EUR rates versus peers is extremely interesting, as the ECB is suddenly considered the only G3 central bank with a feasible path to 50bp cuts. The pricing is now accumulating to 65bp over the next two meetings, with the market base case shifting towards a 50bp cut in December when the ECB updates its projections.
We’ve been banging the drum on the “room left” to reprice EUR rates towards neutral for a while now and have made decent money on the trade. However, we’re left a little puzzled by the gap that’s opened between EUR and GBP+USD rates in recent weeks, especially from a flow perspective.
Flows have clearly turned towards betting on higher USD rates, while CTAs and similar accounts keep receiving EUR rates day in and day out. Is it really feasible for the ECB to move much faster than its peers? It would certainly be out of the ordinary.
One thing I’d like to remind readers of is that markets tend to overestimate the comeback of inflation during October. This has been one of the most stubborn patterns in data over the past 10 years, with markets often caught on the wrong side of soft inflation developments—especially in UK and US data—while it’s LESS obvious in Eurozone data. Perhaps we’ll see a catch-down of market rates in USD and GBP over the next 3-4 weeks as well. We find that increasingly likely (again).
Chart 1a: Hit ratios betting on higher/lower inflation in Germany
We are left with a market pricing that mostly considers 50bp cuts a feasible scenario in the Eurozone, but the ECB is not a 50bp central bank, especially not if its peers aren’t moving that fast.
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