The market has moved beyond pricing an insurance hike and is now leaning towards a full tightening cycle. That is where the opportunity sits.
Markets have already done the easy part for the ECB.
Overnight euro cash is around 2.19%, while the September meeting is priced near 2.44%. A 25-basis-point increase this week is effectively done, with the market assigning it a 99.6% probability. I have little interest in fighting that move. The interesting part of the curve is what comes next.
By December, the market has 46 basis points of cumulative tightening priced. That rises to 67 basis points by late April. The June 2027 €STR contract, TKYM7, is trading at 97.073, implying a rate of roughly 2.93%. That is no longer just an insurance hike. It is a view that the ECB will keep tightening into 2027 and leave short-term rates close to 3%.
I think the market is underestimating how Europe’s inflation shock may weaken the economy that has to absorb it. My preferred expression is via TKYM7.
Below, I break down what inflation swaps, wage data and the German yield curve are really saying about the ECB’s path. The key distinction is whether Europe is entering a durable domestic inflation cycle or absorbing a front-loaded shock that ultimately weakens demand.
Paid readers get access to the GMM Dashboard found at www.globalmacromethod.com as you can see the EU Rates below!
