Is the Market Looking Through the Current Inflation?

Written by: Steven Vannelli | Knowledge Leaders Capital

We recently got the November print for the Eurozone CPI, and it came in hot, hitting 4.9% year over year.

This makes it all the more interesting to see the latest ZEW Inflation expectations for Germany. It has plunged from 80% expecting higher inflation just a few months ago to 37.4% expecting lower inflation in the future.

Its unclear yet whether US residents feel the same way, but investors are expressing the opinion that they foresee a shorter tightening cycle, ending at a lower terminal rate. We can see this in the Eurodollar futures market. The December 2025 Eurodollar future now trades at a 1bp discount to December 2024, i.e., the market is expecting no rate hikes into 2025. It also suggests that the terminal rate will be about 1.7%, below the Federal Reserve’s stated goal of a 2.5% terminal rate.

Of course markets move and this scenario may change, but to the extent that we are in for a shorter and shallower tightening cycle, this may be good for risk assets generally.

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