Higher rates by a fiscal thread, good Eurozone news before the Eurovision, and delayed normalization for cross-asset correlations 

  • US: High interest rates hanging by a fiscal thread. This week on 1 May, while 160 countries celebrated Labor Day, the Fed was far from idle: Central bank policymakers kept rates steady at a range of 5.25% to 5.5%. Apart from a tiny surprise on the rapid slowdown of Quantitative Tightening as of June, all eyes were on high US growth and sticky inflation questioning the so-called terminal rate. We find evidence that the current market pricing of 4% by end-2025 seems largely influenced by large immigration and loose fiscal policy. The “3% growth / 4% interest rates” regime fueled by loose fiscal policy will push interest expenses and debt-to-GDP ratio to record highs before long. The pending election “just isn’t part of our thinking,” Chairman Powell emphasized at the press conference yet fiscal consolidation will eventually weigh on growth and interest rates. Our medium-term view for the Fed interest rate is thus closer to 3%. 
  • Eurozone: Green shoots for growth just in time for the Eurovision. Just in time for the Eurovision in Malmö 7-11 May, the Eurozone has emerged from five quarters of stagnation (+0.3% q/q in Q1), indicating the start of a gradual economic recovery. Meanwhile, ongoing disinflation continues in line with expectations, with core inflation dropping to 2.7% – the lowest level in more than two years. However, the economy continues to show a clear divide, with a thriving services sector and a lagging goods sector, each impacting overall growth and inflation in distinct ways. In this context, we continue to expect the ECB to initiate two rate cuts this year, starting as early as June. 
  • Cross-asset correlations: Normalization takes time. Traditional cross-asset correlations broke during the 2022-2023 abrupt interest rates increase. Now that policy rates have peaked across the developed world, markets expect a policy reversal as both inflation and economic resilience reduce. Yet, with the first rate cut in the US being priced further out in the future, a return to normal cross asset correlations will be delayed. 
Ludovic Subran
Allianz SE
Jordi Basco Carrera
Allianz SE
Maddalena Martini
Allianz SE Branch Rome
Björn Griesbach
Allianz SE
Maxime Darmet
Allianz Trade
Jasmin Gröschl
Allianz SE