Europe and US policy paths to diverge

Chart of the Week

According to recent data, the economic gap between Europe and the US is growing. In Europe, growth remains flat and inflation is cooling. In the US, heady growth, solid job creation and lingering inflation reveal a remarkably strong economy. On the bond markets, US inflation data have pushed 10-year US Treasury–German Bund spreads wider. The US 10-year yield has jumped to 4.5% while the German equivalent sits at 2.5%, a gap of around 200 bps.


Year-on-year inflation over the past 12 months in the US has been hovering around 3–4%, a relatively lofty level. According to data released on 10 April, it reached 3.5% in March 2024, up from January and February. Over the same period, eurozone inflation eased to 2.4%, down from the first two months of the year.

As a result, markets are expecting fewer Fed rate cuts in 2024 and pushing back the timing. While forecasts made a few weeks ago were for three rate cuts this year, current forecasts are for one or two, starting in September. In contrast, the ECB is still expected to cut rates three times starting in June. Christine Lagarde confirmed this expectation at the ECB press conference on 11 April, when she stated that the ECB was data-dependent, not Fed-dependent.

Having followed similar policy pathways since the Covid-19 pandemic, the Fed and ECB are clearly diverging. All eyes will be on what happens next.


Written on April 12, 2024. This is not an investment advice. Opinions subject to change.

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