Undershooting Ahead
- 02 June 2025 (7 min read)
KEY POINTS
We think the ECB will continue to provide reassurance this Thursday beyond “merely” delivering another widely expected 25-bp cut. Bringing the policy rate to 2% takes a particular significance since this level is often seen as the “neutral rate”. Yet, we think the ECB, without providing explicit forward guidance, will make it clear that it can “break” this level and descend into accommodative territory without a too painful internal discussion. The new macroeconomic projections should help. Indeed, relative to the March batch, the Eurosystem’s economists will take on board the appreciation in the euro exchange rate and the further decline in oil prices, which should raise the probability that inflation could undershoot the ECB’s target for a longer share of the forecasting horizon than in March. The picture for the real economy is unlikely to be rosy, even if the German fiscal push could lift the GDP projection somewhat towards the end of the projections.
Still, the pace and magnitude of such cuts will largely depend on the outcome of the EU-US trade talks – which is a strong reason why providing explicit forward guidance is difficult now. Uncertainty on this front has risen further after a decision by the US Court of International Trade invalidating a lot of the tariffs imposed by executive orders (those taken in retaliation against drug and people smuggling, and the “reciprocal tariffs). The Court’s decision has for now been stayed by the Federal Circuit Court, and the case may have to go all the way to the Supreme Court. We explore the case in some detail as it raises some fundamental issues, notably on the separation of power in the US, which has brought together a surprising alliance of Democrats, traditional Republicans and Libertarians. We note however that the US President would still have at his disposal a vast arsenal of tariffs to use, should the Supreme Court side with the CIT. A risk is that EU negotiators, instead of dealing with one, major tariff on most products, end up having to respond to a myriad of sector-specific tariffs, which could make the discussion even more complex.
Disclaimer
This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.
It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.
All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.
Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.
Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.
Risk Warning
The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.