Bank Projections Reflect New Realities for the Remainder of 2025

Exclusive insight for TMI subscribers! Northern Trust Asset Management share a monthly market commentary for treasurers.

Eurozone Market Update

In June, the ECB cut its deposit rate by 25 bps to 2%, returning policy to neutral as expected. Broad support from the Governing Council underpinned the move, but President Christine Lagarde reiterated a data-dependent stance and avoided committing to further easing. The updated Staff Projections provided the vital macro backdrop, with inflation expected to fall to 2.0% in 2025 and dip to 1.6% in 2026, before returning to target in 2027. Growth is projected to gradually rise from 0.9% in 2025, then 1.1% in 2026, to 1.3% by 2027, supported by fiscal expansion. This is particularly the case in Germany, where the creation of a €500bn infrastructure fund for defence spending is expected to play a significant role. While tariff risks remain a concern, the ECB sees only a marginal impact on medium-term inflation. Markets viewed the tone as a sign that the easing cycle is nearing its end. We continue to expect one additional cut this year, most likely in September, with risks skewed toward a second depending on incoming data.

_{Source: Bloomberg, data as of 30 June 2025}

UK Market Update

The BoE held rates at 4.25% in June, but a dovish shift occurred in the 6-3 MPC vote, thanks to Deputy Governor Dave Ramsden’s unexpected support for a cut. He pointed to a softer labour market and easing wage growth, aligning with weak GDP data (down 0.3% in April) and a muted rebound in the Purchasing Managers’ Index to 50.7. While Governor Andrew Bailey stressed that the hold was not a policy signal, markets interpreted the tone as more open to near-term easing, raising the probability of an August cut to 80%. Inflation remains elevated but broadly on track, with services CPI easing to 4.7%. The government published its Spending Review 2025, confirming departmental budgets through 2026-27 and leaving little room for future fiscal support. This adds downside risk through fiscal tightening and raises the likelihood of further cuts by year-end, something that markets are already pricing in. We continue to expect a cut in August, with potential for a quicker easing pace if data weakens further.

_{Source: Bloomberg, data as of 30 June 2025}

US Market Update

The Fed held rates steady in June and retained it’s cautious, data-dependent stance. While Chair Jerome Powell said the economy remains in a “solid shape,” he reiterated that policymakers need more evidence before making any cuts. The updated Summary of Economic Projections (SEP) showed that markets are more dovish than the Fed, pricing in three to four cuts over the next 12 months versus the SEP’s median projection of two. That divergence widened as the updated dot plot showed that more participants now expect only one or no cuts in 2024, with forecasts for 2026–27 revised higher. This signals a more hawkish long-term view. From a portfolio perspective, the message is clear: current rates are close to fair value, and positioning remains neutral. Trade remains a wildcard. Powell acknowledged tariff uncertainty but offered no firm view on inflationary spillovers, leaving markets to wait for clarity over the summer.

_{Source: Bloomberg, data as of 30 June 2025}

Looking Ahead

As we begin the second half of the year, focus turns to the 9 July US-EU tariff deadline. Both sides have signalled progress, with a 10% reciprocal tariff framework under discussion. If agreed, it would ease the risk of EU countermeasures on up to €95bn of US goods. US talks with Japan and India are less advanced, though a short extension remains possible if negotiations continue constructively. Central bank meetings later in the month are also in focus. The Fed is likely to stay on hold, but recent comments from Governors Waller and Bowman point to a potential pivot if inflation or labour market data weaken. Still, our base case sees the first rate cut at year-end. The ECB, nearing the end of its easing cycle, is expected to pause in July, with a September cut remaining the most likely next step if data remains soft. Tail risks to our base case centre on geopolitical instability, particularly Iranian energy disruption, which could reignite euro area inflation and stall further easing.

Chart of the Month

_{Source: Bloomberg as of 30 June 2025}

_{IMPORTANT INFORMATION}

_{For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors.}

_{The information contained herein is intended for use with current or prospective clients of Northern Trust Investments, Inc (NTI) or its affiliates. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust Asset Management’s (NTAM) and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.}

_{All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTAM’s efforts to monitor and manage risk but does not imply low risk.}

_{Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTAM. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For additional information on fees, please refer to Part 2A of the Form ADV or consult an NTI representative.}

_{Forward-looking statements and assumptions are NTAM’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.}

_{Hypothetical portfolio information provided does not represent results of an actual investment portfolio but reflects representative historical performance of the strategies, funds or accounts listed herein, which were selected with the benefit of hindsight. Hypothetical performance results do not reflect actual trading. No representation is being made that any portfolio will achieve a performance record similar to that shown. A hypothetical investment does not necessarily take into account the fees, risks, economic or market factors/conditions an investor might experience in actual trading. Hypothetical results may have under- or over-compensation for the impact, if any, of certain market factors such as lack of liquidity, economic or market factors/conditions. The investment returns of other clients may differ materially from the portfolio portrayed. There are numerous other factors related to the markets in general or to the implementation of any specific program that cannot be fully accounted for in the preparation of hypothetical performance results. The information is confidential and may not be duplicated in any form or disseminated without the prior consent of NTAM.}

_{This information is intended for purposes of NTI and/or its affiliates marketing as providers of the products and services described herein and not to provide any fiduciary investment advice within the meaning of Section 3(21) of the Employee Retirement Income Security Act of 1974, as amended (ERISA). NTI and/or its affiliates are not undertaking to provide impartial investment advice or give advice in a fiduciary capacity to the recipient of these materials, which are for marketing purposes and are not intended to serve as a primary basis for investment decisions. NTI and its affiliates receive fees and other compensation in connection with the products and services described herein as well as for custody, fund administration, transfer agent, investment operations outsourcing and other services rendered to various proprietary and third party investment products and firms that may be the subject of or become associated with the services described herein.}

_{Northern Trust Asset Management is composed of Northern Trust Investments, Inc. Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K, NT Global Advisors, Inc., 50 South Capital Advisors, LLC, , Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.}

_{NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE}

_{© 2025 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A.}