HSBC: Have Markets Gone Too Dovish On The ECB?

HSBC write “the subdued growth environment - compounded also by weakening labour market data in the US - has led investors to bring forward considerably their expectations for future rate cuts.”

• “Granted, the early stage of the disinflationary process is well in progress. But as ECB Board Member Isabel Schnabel reminded on 2 November, “in long-distance running, the last mile is often said to be the hardest [and] the same could be said about tackling the last mile of disinflation.””
• “The latest pay deals show wage growth still picking up, while the ECB forward looking wage tracker points to wage growth at around 4.5% through to mid-2024.”
• “The latest ECB Corporate Telephone Survey shows firms expecting lower pay rises next year, but still half of the firms see wage growth higher than 5% next year.”
• “This should keep inflationary pressures high next year, particularly if consumption recovers a little on the back of positive real wage growth, meaning firms might not need to take such a big hit on profits.”
• “Eurozone consumers still see inflation at 2.5% three years out.”
• “The lack of clear fiscal consolidation next year could also contribute to the ECB retaining a hawkish bias. The European Commission's forecast published next week should shed further light on this. Meanwhile, the newswires (MNI) are suggesting that hopes for a deal on EU fiscal rules reform by year-end are rising ahead of this Thursday's Finance Ministers gathering in Brussels.”