JPMorgan Asset Management and Pictet Diverge from Peers in ECB Interest Rate Calls

European Central Bank Meeting: Investors Predict 'One and Done' Rate Hike

Big-name investors are taking a contrarian stance ahead of Thursday's European Central Bank meeting, arguing that the expected hike in interest rates will be a case of "one and done" due to lackluster economic growth on the continent. JPMorgan Asset Management and Pictet Asset Management are among the investors predicting that policymakers will not pursue further cuts after Thursday, even as the ECB underscores its commitment to returning inflation to target.

The market and economists, on the other hand, are signaling a threat of inflation spurred by the war in Iran, with traders favoring 75 basis points of increases by year-end. The messaging from central bankers will be crucial - if the investors are right, bonds could rally, potentially lowering yields from near their highest levels in years.

The European economy is not picking up, according to Luca Paolini, chief strategist at Pictet. Policymakers want to avoid past mistakes, such as raising interest rates in 2008 and 2011, only to see price pressures prove temporary amid the global financial crisis and euro-zone crisis, respectively.

Read also: Dalal Street Week Ahead: Key Themes to Monitor Include US-Iran Tensions, FII Trading Activity, and Crude Oil Prices

According to Zara Nokes, global market analyst at JPMorgan AM, the central bank is unlikely to pursue further cuts after Thursday if economic activity remains sluggish. Market gauges of inflation expectations rose sharply after the start of the war, but have since retreated from a peak in April. The one-year, one-year inflation swap jumped from 1.75% at the end of February to 2.40%, but has since fallen back to 2.12%, only narrowly above the ECB's official target of 2%.

Data Friday showed that the euro area's gross domestic product fell in the first quarter of this year, instead of climbing as economists forecast, due to a sharp downward restatement for Ireland. Earlier last week, the OECD said the euro area will grow just 0.8% this year and warned of "deteriorating sentiment."

Guillaume Rigeade, co-head of fixed income at Carmignac, believes that the ECB will hike by 25 basis points on Thursday, but not enter a sustained rate-hiking cycle. Rigeade is long German two-year bonds on the view that the ECB won't hike as many times as the market has priced.

Read also: Centre Considers Dropping Rajesh Exports from Battery PLI Scheme Amid SEBI Fraud Allegations

Lauren van Biljon, portfolio manager at Allspring Global Investments, also doesn't see an increase on Thursday marking the start of a sustained rate-hiking cycle. She's been using the selloff in European government bonds to add modestly to duration, picking bonds that post bigger gains in response to interest rates coming down.

A Bloomberg survey of economists conducted May 29-June 3 indicated that all respondents but one anticipate a quarter-point hike at Thursday's meeting - which would be the central bank's first hike since 2023. Most then see another increase before the end of the year, with a cut coming only mid next year.

However, some investors agree that there could be more aggressive tightening. David Zahn, head of European fixed income at Franklin Templeton, is betting against duration and reckons the bond market selloff has further to run, with the yield curve steepening as higher inflation keeps upward pressure on long-term yields.

Ultimately, it comes down to where oil prices settle over the remainder of the year and the impact on inflation expectations. With talks dragging on between the US and Iran, none of that is clear.