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The ECB is highly likely to cut rates this Thursday, although the dataflow has not been necessarily helpful recently. We think that central banks should wait until all indicators are aligned before changing gear only in some very specific cases: when long-term inflation expectations are de-anchored, when monetary policy transmission is impaired, when the monetary stance is counter-acted by fiscal policy and finally when there are strong indications the neutral rate has moved higher. We don’t think any of these conditions apply to the Euro area today.

With a high level of trust in the fact that monetary policy is restrictive and will remain significantly so even after a first 25 bps cut, the ECB in our view could easily take the risk of sketching out its trajectory for the remainder of 2024. We do not think they will though. We expect little forward guidance on Thursday, notably because opinions within the Governing Council remain too far apart for a consensus to be built at this stage. For our part, we expect the ECB to cut also in September and December. Such measured pace would be justified by some pockets of resistance to disinflation in the services sector and the risk that the profit margin behaviour of the business sector slows down the convergence to the ECB’s target. Such “margin resistance” could however materialise only if decent cyclical conditions prevail. Business confidence indicators have been kinder to the Euro area recently, but we think the balance of risks still lies on the downside, and that the Governing Council should remain ready to remove restriction faster. Data dependence should go both ways.

Conversely, the conditions for waiting until a near-perfect alignment of indicators materialises are met in the US, in our opinion, which makes the Fed’s reluctance to discuss a timeline for a change of stance perfectly understandable. However, we think the dataflow is precisely starting to align, with for instance more signs that consumer spending is softening. This week’s labour market data will of course be crucial from this point of view, with job opening number out on Tuesday and payrolls on Friday.