However, while the “terminal rate” priced in the euro area real overnight index swap (OIS) forward curve had edged up initially, a sharp decline in expected inflation, on the back of lower gas prices and inflation surprises to the downside, had later contributed to market participants revising down their rate expectations. Expectations of rapid disinflation had also induced markets to price in material rate cuts as of 2024, suggesting that they judged the period of restrictive monetary policy needed to rein in high inflation to be relatively short.

These developments, alongside further signs of a more resilient euro area economy and the reopening of China’s economy, had boosted risk sentiment. Risk premia had declined measurably across market segments, compressing bond spreads and boosting equity prices, while the euro had appreciated further across the board as sentiment towards the euro area…