US Leads Easing Talk as Risks Shift

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

Eurozone Market Update

With no ECB meeting in August, attention shifted to market data and speeches from central bankers. President Christine Lagarde adopted a cautious tone, flagging risks to Q3 growth while noting that recent trade agreements had reduced, though not eliminated, global uncertainty on tariffs. Flash Purchasing Managers’ Index (PMI) data showed resilience, with the composite rising to 51.1 compared to an expected 50.6. This was the highest level since May 2023, driven by a rebound in manufacturing (50.7). Services held steady, suggesting a broad-based pickup. July inflation data indicated a gradual rebalancing: headline inflation eased to 2.1%, with core inflation easing to 2.3%, but services inflation remained sticky at 3.2%. Despite resilience, the ECB is unlikely to cut in September. We continue to see October as the next viable easing window, contingent on updated projections and trade clarity.

EUR Short Term Rates

UK Market Update

In August, the BoE cut rates by 25 bps to 4% as expected, but the vote was unusually tight at 5-4. While, four MPC members voted in favour and four voted to hold, Alan Taylor backed a 50 bps cut. But, in a rare revote, Taylor eventually moved in favour of a 25 bps cut. Despite easing, the Bank struck a hawkish tone, raising near-term CPI forecasts to 4% and shifting focus from labour to inflation risks. Services inflation accelerated to 5%, but underlying momentum appears to be easing. The UK composite PMI improved, on the back of services PMI rising to a 12-month high of 53.6 (versus 51.8 expected) while labour data was also modestly stronger than expected. Following this stronger data and hawkish BoE messaging, investors dialled back rate cut expectations for the rest of the year with the market-implied probability of a December cut falling to 42-45%, compared to over 50% earlier in the month. Governor Bailey also noted that the yield curve would factor into future quantitative tightening decisions. For treasurers, this reinforces the need for caution in duration positioning.

GBP Short Term Rates

US Market Update

At the Jackson Hole annual policy symposium in Wyoming last month, Fed Chair Jerome Powell signalled a dovish pivot, suggesting that further labour weakness may no longer be needed to justify easing. Markets now expect three 25 bps cuts by March 2026. Labour data softened, with jobless claims rising and payroll revisions highlighting a weaker trend. However, upside inflation surprises, particularly in producer prices, led markets to slightly temper expectations of a September cut. Political risks intensified as President Trump sought to remove Fed Governor Lisa Cook, who remains in place as the issue heads to the courts. Legal uncertainty and changes in board composition could tilt the Fed more dovishly. For corporates, rising policy uncertainty and yield volatility underscore the value of flexible liquidity strategies and continued demand for short-duration, floating-rate instruments.

USD Short Term Rates

Looking Ahead

Economic and policy uncertainty remains elevated. In the US, concerns over the Fed's independence have contributed to market volatility. Following softer labour data and Powell’s dovish remarks at Jackson Hole, he noted a shift in the balance of risks, with rising downside risks to employment and less need for further labour weakness to justify easing. We now expect two rate cuts in 2025, starting in September, with a third cut a rising possibility. Market pricing reflects growing confidence in this path. In the Euro Area, with inflation nearing the ECB’s 2% target and improving data such as PMIs, the likelihood of a September cut has diminished. October remains possible, depending on updated projections. In the UK, persistent inflation and stronger data point to a pause in September. A November cut is possible but hinges on incoming data, fiscal policy, and the all-important Autumn Budget.

Chart of the Month

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