The Fed isn’t the only game in town this week. In addition to the June FOMC meeting, traders will be treated to an ECB gathering which will surely result in another rate hike.

Staying apprised of ECB policymaker interviews and media cameos is well-nigh impossible, but Christine Lagarde made it pretty clear recently that the Governing Council doesn’t see conclusive evidence that core inflation is poised to moderate sustainably. More hikes are coming.

Revised data released last week showed Europe didn’t dodge a winter recession after all, but the downturn was better described as stagnation. The bloc’s economy shrank 0.1% in Q1 following a similarly minuscule contraction the previous quarter. It was a “recession,” but only for the purposes of media headlines.

Inflation, meanwhile, has moderated. Headline price growth receded to 6.1% in May, the slowest YoY pace since Russia invaded Ukraine. Energy prices are obviously a big factor. Europe was mercifully spared an existential energy crunch during the winter months, and benchmark natural gas futures are now the lowest in two years.

But core price growth remained near record highs at 5.3% in May. Services inflation ran at 5%, underscoring inflation’s “migratory tendencies,” as I put it a few weeks ago.

I should emphasize that all of May’s preliminary CPI prints constituted downside surprises. That’s good, but we’re a long (long) way from 2%. Final CPI readings for last month are due Friday.

“[We] expect only a gradual cooling in core inflation [but] the relief in headline will be an important factor in upcoming wage negotiations and points to a reduction in the risk of high wage / inflation outcomes,” Goldman said, of the ECB’s predicament. The bank expects this week’s hike to be accompanied by “soft guidance that more tightening is needed.”

Market pricing reflects terminal around 3.75%. There’s no easing to speak of priced for the remainder of the year. There for a while, market pricing reflected an even higher terminal rate and hikes continuing into 2024. So, we’re off peak pricing.

Obviously, traders will be keen on any additional color around the balance sheet, including whether QT might eventually be expanded to the PEPP portfolio. I don’t know why I bother saying that — the statement language indicates that’s not under consideration and that runoff will be confined to APP for the foreseeable future.

The PEPP reinvestments can be used as an anti-fragmentation tool, so I doubt the ECB is in a hurry to wind down that portfolio. As a reminder, APP reinvestments will cease altogether starting in July. Accelerated ECB QT is an aggravating factor in the well socialized “liquidity drain” bear case for risk assets headed into the back half of the year.

“Despite the recent decreases, actual headline and core inflation and expectations for inflation only to return to target in two years are clear arguments for the ECB to not only continue hiking by 25bps next week but to also keep the door open for rate hikes beyond then,” ING’s Carsten Brzeski said. “However, the eurozone economy has turned out to be less resilient than anticipated a few weeks ago and confidence indicators, with all the caveats currently attached to them, point to a weakening of growth momentum again.”

Make of it what you will. The odds of over-tightening are probably high, but as Brzeski went on to say, “the ECB simply cannot afford to get it wrong again.” If leaning into the inflation fight means risking a Trichet-style error, so be it.