STIR: US Data Reaction Lets Hawkish Adjustment Extend In EUR STIRs

The reaction to this afternoon’s US PCE data allowed the hawkish adjustment of the ECB’s implied rate path to extend a little, though lower-than-expected UMich inflation expectations limited the move. ECB-dated OIS now price 63bps of easing through year-end, down from 67bps this morning.

• Although today’s Eurozone August flash inflation data was in line with initial consensus, services inflation saw a larger-than-expected acceleration to 4.2% Y/Y (vs 4.0% prior).
• This underscored earlier commentary from ECB Executive Board member Schnabel, who reaffirmed her preference for a cautious and gradual easing of monetary policy.
• We had previously noted that ECB pricing had been stretched relative to policymaker preferences for quarterly cuts.
• OIS now price a less-than 50% implied probability of a 25bp cut through October (in addition to a fully priced 25bp cut in September). That’s down from almost 100% in early August.
• Today’s ECB-speak re-affirms a September cut as the base case amongst policymakers.