As viral trends tug our attention in different directions, one trend has remained steadfast in investor’s minds – disinflation. Broad-based disinflation in the US has allowed the Federal Reserve (Fed) to deliver a re-calibration 50 basis point (bp) cut.

The market has priced the Fed as the trend-setter. We characterize the European Central Bank (ECB) as the next up-and-comer for a deeper, faster pace of cuts; and the Bank of England (BoE) as the trend-chaser. The key driver of the differences lies in their labour markets.

The Fed: Why the rapid Trend-Setter?

Inflation is no longer a problem in the US. The core Personal Consumption Expenditures (PCE) price index has broadly normalized with the 3m/3m run rate back around the Fed’s 2% target. The remaining strength is narrowly based in the services sector [Figure 1]. We see little evidence to support a re-acceleration in services inflation given where leading shelter indicators lie, combined with labour market loosening and hence softening wage growth.

Given this backdrop, the Fed can afford to be more attentive to downside risks in the labour market where the aggregate of surveys highlights further gradual contraction, but certainly not collapse, as we saw in September’s payroll print. The Fed’s dovish pivot, signalling approximately 200bps of cuts through their dot plot, is paving the way for other central banks to follow suit.

The ECB: The Up-and-Coming

The ECB pivot is on its way. Christine Lagarde, the President of the ECB, embraced a cautious tone at the October meeting. However, given the inflation data is undershooting the ECB’s inflation forecasts combined with further weakness in survey data, the risks are skewed towards deeper ECB cuts.

Activity data is not looking rosy, especially in Germany, due to structural trade shifts and economic cyclicality. However, wage growth is still high, which should support consumption, so why not continue cutting gradually instead? It is important to note that the labour market in the Eurozone hasn’t tended to be a leading signal in an economic cycle. This is mainly because of structural rigidities due to regulation (e.g., unionisation) and above average levels of labour hoarding post Covid.

There is strength in the employment data, but there are cracks in survey-based measures. This corroborates the progress made on forward-looking wages, where wage growth is expected to slow to around 3% in 2025. The structure of the labour market implies that wage growth is more of a lagging measure of the underlying inflation trend in the Eurozone than the US. All of this provides comfort that services inflation should continue falling; leading indicators further signal that service inflation should fall from the current level of 4% to approximately 2.5% over the course of next year [Figure 2].

The BoE: The Trend Chaser

The BoE should be the last domino to fall out of the “gradual approach” dimension. Still, the BoE lacks evidence of a sustainable move back to target inflation, while activity data also looks stronger than Europe.

The supply-side recovery has been the weakest in the UK. Working age participation is significantly lower than pre-pandemic [Figure 3], exacerbating labour mismatches and creating a more rigid labour market. This has put bigger uncertainties around how much wage growth will fall. Surveys are generally pointing to a deceleration, as in Europe, but are stabilising at a higher level of approximately 4%, while the BoE needs that to be closer to 3%. The Labour government also committed to a significant national minimum wage rise in April 2025. Whilst services inflation is expected to fall below 3.5% over the next year, these changes could provide sticky upward pressures.

In sum, there has been the least in the domestic data so far to create greater urgency around monetary policy easing. More weakness in the data will be required for the BoE to have confidence in a shift in the pace of easing.

What is the next trend?

The Fed has been the trend-setter in the cutting cycle, the ECB is the next up-and-coming, and the BoE is so far the trend-chaser. As services inflation in the Eurozone and UK roll over, the labour markets will be the key determinant of the speed and depth of the cutting cycle. We see attractive opportunities in Europe and UK government bonds to position for eventual central bank pivots.