CREDIT UPDATE: EU Close

Sticky Services Pose Modest Risk To End-Year Rate Cuts

Our review of July's preliminary Eurozone inflation data has just been published (PDF here), and includes breakdowns and analysis of the national inflation prints, and some sell-side reactions.

• Eurozone core inflation surprised marginally to the upside in July, with the 2.86% Y/Y unrounded print (unchanged from June) enough to surprise analyst expectations to the upside by one-tenth of a percentage point on a rounded basis again. Headline inflation also exceeded expectations, at 2.59% Y/Y.
• Familiar themes remained at play though. Services HICP fell by 0.1pp to 4.0% Y/Y but is yet to show signs of meaningful further disinflationary progress, while core goods inflation accelerated 0.1pp to 0.8% Y/Y.
• The main takeaway here is that some caution on inflation developments continues to be warranted, predominantly since serious progress on the services disinflation process is yet to show.
• Looking forward, inflation is likely to decline slightly in the coming months partly owing to base effects, opening the door for even the more hawkish cohort of the Governing Council to vote for a second interest rate cut in September, and July’s data provided relatively little news here.
• As such, EZ interest rate market pricing only saw minor moves in the last days, with cuts continuing to be almost fully priced in for the quarterly projection meetings in September and December. Cumulatively for 2024, OIS data implies 58bps of further cuts at the time of writing, compared to 55bps prior to the start of the HICP data release period.