The U.S. Federal Reserve still needs to raise interest rates despite a soft jobs report. Meanwhile, the European Central Bank may already be finished tightening. That was the message from economists at an economic forum in Aix-en-Provence, France. The divide comes down to stubborn inflation in the U.S. versus cooling price pressures in Europe.
The persistence of U.S. inflation is underpinned by robust fiscal stimulus, an investment wave in artificial intelligence, and elevated energy costs, which together keep demand strong. In contrast, Europe benefits from declining energy prices and a weaker economic outlook, making further rate hikes less necessary.
The unemployment rate fell to 4.2% as labor force participation dropped sharply. The market still expects a quarter-point rate hike from the Fed this year, just not until December.
Allianz chief economist Ludovic Subran said the soft report does not change his view. "I still think inflation is peaking above 3.7% and there is still this AI, fiscal and energy-fueled economy. The Fed may have to hike in September." He pointed to pressures from artificial intelligence, government spending, and energy that keep the U.S. economy running hot.
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BNP Paribas chief economist Isabelle Mateos y Lago agreed. "If we had had a very strong payroll closer to 130 or above, then I think July would have been a very, very live meeting. "Probably less so now, but in my mind, the case for rate hikes from the Fed is undiminished"."
In Europe, the story is different. The 2.8% inflation figure gives the European Central Bank less reason to keep raising rates. The ECB already delivered what Subran called "an insurance hike" in its last meeting. He now says, "as we look into the numbers now, it looks like it's done."
Still, BNP Paribas's base case is that the ECB delivers one more quarter-point hike in September. Mateos y Lago noted that "it was noticeable how the Governing Council members who spoke in Sintra left the door wide open to not doing this additional rate hike." Bank of France governor Emmanuel Moulin, who sits on the ECB's rate-setting council, said the bank is in a good place: "The balance of risk is in the right place."
AXA Group chief economist Gilles Moec summed up the divide: "The inflation story is much more problematic in the US than it is in Europe. "Monetary policy was already restrictive in the US, while it was not in Europe. So you could argue that all they have to do, both of them, is just to stay where they are"."
Market attention now turns to the Fed's July 29 decision. With only a 20% chance of a move, the real action may come in September or December. For the ECB, September remains the key date for a possible final hike - or a pause that could last for months.
Allianz stock closed at 420.30 euros, up 0.53% on the day.
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