Labor Market

Core PCE inflation came in soft this morning and is tracking well below the Fed’s 2025 forecast. We highlight three upside risks to inflation and preview next week’s employment report.

The ECB cut its deposit rate to 2.75%, as was widely anticipated. President Christine Lagarde did not provide any fireworks, but the Governing Council’s message was clear: Policy is restrictive, and inflation will fall further. As a result, if we combine our economic forecasts for the Eurozone with Frankfurt’s data dependency, we continue to expect the ECB’s deposit rate to settle below 2%. Consequently, German bond yields have downside, and the euro has yet to bottomed.

We were stopped out of our defensive asset allocation recommendations last Thursday, when the S&P 500 closed above 6,100, but our reading of the labor market tea leaves still supports a bearish fundamental view.

Global risk assets are engulfed in a wave of euphoria, which is pulling Europe higher along the way. However, risks still abound. How should investors adjust their allocation to Europe under these highly uncertain conditions?