Happy Monday.

We have now had a few days to digest the message from the ECB meeting and as per usual we show the four charts that we find will drive probabilities around the outcome of the next few meetings.

The hike in July is basically carved in stone unless a traffic accident occurs ahead of the meeting. Focus needs to be on the September pricing as the ECB will update projections again and as Lagarde has not found a consensus around that meeting yet (also according to sources).

The ECB updated projections with market/inflation data for core- and headline inflation AHEAD of the May inflation report, which means that we already know that projections would be taken down given the knowledge we have today.

There are two major inputs to core inflation forecasting. 1) Actual inflation (explains most of the short-term variation) and 2) unit labor costs. We’d argue that 1 has a large probability of surprising on the low side before September, while 2) is trickier to assess due to extreme volatility in the productive part of the ULC equation.

Chart 1: Hike in September? Inflation projections are likely to come in lower