US vs RoW – Diverging narrative
The latest round of macro data has reinforced a clear divergence between the US and the rest of the world. While activity indicators outside the US remain relatively soft, the US economy continues to show signs of resilience, with growth momentum still firm and inflation risks not fully contained. This has pushed markets back toward a pro-growth and overheating narrative. Positioning increasingly reflects this shift, investors are leaning long US equities, long commodities, long credit and carry, while expressing the macro view through short rates positions. In other words, the market is starting to price in a scenario where growth remains strong, risk assets continue to perform, and central banks may need to keep financial conditions tighter for longer. Outside the US, the tightening cycle is already more visible in market pricing, with the ECB and other central banks expected to move. The Fed, however, remains the key missing piece. If the recent strength in US data persists, it could challenge the current market expectation of a relatively benign Fed reaction function and force incoming Fed Chair Warsh to adopt a more hawkish tone than investors currently anticipate.
ECB – The stage is set
This week, the ECB looks set to begin its hiking cycle with a 25 basis point move to 2.25%, as upside risks to inflation continue to build. Soft growth indicators continue to deteriorate, while energy prices are moving close to the ECB’s adverse scenario. Markets are already pricing in more than two hikes in 2026 and, although there are still no clear signs of second-round effects, the ECB’s 12-month inflation expectations survey has risen to 4.0%. The risk here is a policy mistake. In 2022, the ECB moved too late; in 2011, it tightened too early. With growth still fragile and downside risks to activity increasing, the balance between inflation control and avoiding excessive tightening will be crucial. A busy calendar of central bank meetings over the coming weeks should help provide more clarity on how policymakers intend to proceed.
Algebris Investments’ Global Credit Team
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