The ECB’s Survey on the Access to Finance of Enterprises (SAFE), based on responses from more than 5,000 firms, shows price-setting expectations easing. Expected growth in selling prices slowed to 3.2% year-on-year, compared with 3.5% in the previous survey, pointing to a cooler near-term pricing outlook.
Cost pressures are also expected to moderate: firms see non-labour input costs, including energy, rising by 5.2% year-on-year, down from 5.8% previously. Inflation expectations at the one, three and five-year horizons were broadly unchanged, while expectations for increases in selling prices, non-labour input costs and wages all moved lower. The survey also indicates that the war in the Middle East is pushing firms to look for alternative suppliers and to improve energy efficiency.
Implications For Monetary Policy And Interest Rate Derivatives
As the ECB’s latest SAFE survey shows firms cooling their inflation and cost expectations, we expect a stronger case for monetary easing in the Eurozone over the coming weeks. With selling price expectations dropping to 3.2% and non-labor inputs falling to 5.2%, the pressure on the central bank to maintain high interest rates is quickly dissolving. This alignment supports a continuation of the rate-cut cycle that has already seen the deposit facility rate edge down toward the 2.5% mark in recent months.
For interest rate derivative traders, we recommend positioning for further yield declines by going long on three-month Euribor futures. Historically, when corporate cost outlooks soften this rapidly, government bond yields tend to follow suit as the market prices in looser monetary policy. Buying Eurozone sovereign debt options or receiving fixed rates in Euro interest rate swaps offers an attractive risk-reward ratio right now.
Equity And FX Derivative Trading Strategies
In the equity derivatives market, we should look to buy call options on consumer-discretionary and industrial indexes, which will benefit directly from lower input costs. While geopolitical tensions in the Middle East are forcing companies to find alternative energy suppliers, the overall drop in cost expectations shows that these supply-chain adjustments are already being successfully managed. This resilience makes bullish equity strategies safer, especially as cheaper credit begins to boost corporate profit margins.
Finally, in foreign exchange derivatives, we expect the Euro to face downward pressure as the ECB likely outpaces the Federal Reserve in cutting rates. Trading strategies should focus on buying EUR/USD put options to capitalize on this widening policy divergence. Recent economic data showing Eurozone inflation hovering close to the 2.0% target further supports this bearish Euro outlook in the near term.
