Fed & ECB Preview – Maintaining a tightening bias
The Fed will likely hike rates by another 25bp on Wednesday, bringing the range to 5.25 – 5.50%. The latest dot plot anticipated one more hike in addition to this one, and we expect discussions to be focussed on the length of policy lags, the strength of recent data, and the likelihood and timing of another hike. Similarly, the ECB is also likely to raise rates by 25bp, reaching a rate of 3.75%.
The minutes of the last meeting read fairly dovish stance, but hawks like Netherland’s Knot have recently signalled openness regarding the need for further hikes beyond this week. Overall, both central banks are likely to maintain a tightening bias but will focus on data dependency.

Data Preview – PMIs, Bank Lending Survey and Eurozone CPI
Today we have PMIs, where especially services PMIs had recently started to weaken – and a continued weakening would be key for central banks to slow. Consensus expectations indicate a further decline in PMIs, although services are expected to remain above 50 for US, EUR and UK. On Tuesday, we see the ECB’s Q2 Bank Lending Survey, providing insights into the progress of monetary policy transmission in the Eurozone through lending standards and loan demand. As for Eurozone inflation prints, starting with Germany, France and Spain, they will be available from Friday onwards. Spain’s HICP already stood at 1.6%, below the ECB’s 2% target last month and is expected to rise slightly to 1.9% despite an expected -0.4% MoM print. Meanwhile, Germany’s HICP is likely to fall to 6.6% from 6.8%, and France should fall to 5.2% from 5.3%. Italy and the Eurozone aggregate will follow on 31st July.

UK Inflation – Down but still high
UK inflation decreased last week to 7.9% YoY, down from 8.7% and 0.3% below the survey estimate. Core inflation also fell slightly to 6.9% from 7.1%, with the significant services category finally declining from 7.4% to 7.2%. The downward surprises triggered a 30bp rally in UK rates, helped by very short rates positioning which was partially unwound. The UK remains a clear outlier in terms of inflation levels, and strong retail sales on Friday showed continued economic resilience. With the decline in inflation, the BoE now has the potential to slow the hiking pace again on 3rd August – with the market pricing in 50/50 odds for a 25bp vs 50bp move.

Algebris Investments’ Global Credit Team