The latest ECB wage tracker shows that wage growth from negotiations is decreasing. The forecast for 2025 is now 3.1%, down from 4.7% in 2024. In early 2025, negotiated wages fell to 4.6%, down from 5.4% at the end of 2024. This slowdown in wage growth matches the ECB’s policy strategy and supports their views on future inflation. The drop in agreed salaries indicates that wage pressures in the euro area are easing, especially alongside recent reductions in consumer prices. The slower wage growth is not happening in a vacuum; it’s a sign of weakened demand in sectors that previously drove wage increases. Manufacturing and construction, in particular, are putting less upward pressure on wages, contributing to this broader trend. The European Central Bank will likely see these lower figures as supporting their recent policy decisions. With falling headline inflation and negotiated wages, the argument for further rate increases weakens. However, an immediate and significant policy change isn’t expected either. Most data still suggest a gradual slowdown, not a sudden reversal. The key point for us is not just the headline numbers, but what they mean for expectations around future rates and volatility. Fewer surprises in wage inflation limit surprises in policy changes. This narrows the range for rate differentials and reduces the likelihood of sudden shifts in interest-sensitive products. It alters the risk-reward dynamics—short-dated interest rate futures and options now provide less opportunity for significant moves without new triggers. During her last press briefing, Lagarde highlighted this trend. She recognized the changes but linked continued easing to future data. For this reason, we should expect market confidence in July’s meeting to heavily depend on next month’s wage revisions and core inflation indicators. The easing of wage pressure is already reflected in swap curves, especially in the mid-range. Traders who previously expected a resurgence in wage inflation are now moving towards flatteners, especially in euro-based instruments. This shift is supported by the ECB’s quarterly surveys, which project subdued wage-setting behavior due to lower profit margins and weaker demand forecasts. The options market is reacting similarly. Mid-curve volatility is decreasing, while risk reversals for December options indicate fewer scenarios requiring significant rate hikes. This aligns with the expectation that monetary conditions could shift from restrictive to neutral, but not immediately. With slowed wage growth and softened inflation signals, the relationship between inflation swaps and bets on policy tightening is weakening. This opens tactical opportunities to reevaluate previous market assumptions that are now less likely. However, timing is crucial. The upcoming labor cost index release and composite PMIs must support the current pricing adjustments. Trading flows show that medium-dated receivers are still preferred, particularly in the 2-5 year range. There’s also renewed interest in layered structures that benefit from stable policy without full reversals. This suggests a cautious approach—adjusting positions for less volatility while staying alert for any signs of increased market activity. In summary, these wage figures are more than just economic indicators; they represent a clear shift reflected in yield curves, options premiums, and trading flows. This is where the focus should be in the coming weeks. Stay disciplined, pay attention to secondary data, and engage with the disinflation narrative wisely.

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