The Last One?

• Both Fed and ECB are highly likely to hike by 25 bps this week, we think for the last time for the Fed, while we remain more in the “September peak” camp for the ECB, despite some soothing words from hawks.
• Spanish elections may not have brought much clarity, but the country’s underlying situation is robust enough to help it deal with, potentially, some more months of uncertainty.

The Fed is highly likely to hike by 25 basis point this week, but focus will be on the next steps. In the absence of new forecasts, it should be relatively easy for J. Powell to keep his hands free for September. After all, the June statement was already quite non-committal. We think July will mark the end of the Fed’s tightening cycle, but that remains conditional on the further accumulation of signs the US economy is slowing down.

We also think the ECB will hike by 25 bps this week, but to move more convincingly into data dependent mode – now that even hawks don’t want to take a September hike as a given - the central bank must alter its prepared statement to remove the notion that policy rate “will be brought” to sufficiently restrictive level. This would be taken as a major dovish shift by the market, and we think Lagarde will have to offset this by sending some hawkish messages in the Q&A. Looking ahead, there is still a key element missing for the Governing Council to stop hiking beyond July: an observable deceleration in core inflation, unlike in the US.

The BOE will have until August to decide on its next move. We must be cautious, but the better-than-expected inflation print for June could keep the next hike at 25 bps “only” and reduces the risk the BOE steers a lonely and painful tightening course beyond the summer.

With near complete results on Sunday night, it seems the right-wing block failed to reach a majority in parliament. Pedro Sanchez could in principle cut a deal with regional parties to stay in power, but this would put him in a fragile position and another election in a few months is a real possibility. We review the country’s underlying position and find it overall robust enough to deal with some months of uncertainty without too much market tension.