Advancing ECB Rate Hike Expectations

Market movers today

A quiet end to the week, with no key data releases or central bank speeches scheduled for today. Focus remains on the outlook for central bank policy tightening and further details on EU’s next round of sanctions on Russia.

The 60 second overview

Advanced ECB rate hike expectations: We revise our ECB call slightly after the recent Governing Council (GC) comments, hawkish minutes (more below) and inflation surprises. We now look for a 25bp rate hike in both September and December 2022. Beyond that, we do not look for a prolonged hiking cycle into 2023 at the current stage as inflation falls back to target and Fed tightening will also have contributed to a significant tightening of financing conditions globally – worsening the economic outlook, see more in our ECB Preview – Lagarde to bring September into play – we revise our ECB call, 8 April.

ECB minutes: The ECB minutes of the March meeting released yesterday were hawkish as also noted by rates markets. Concerns about second-round effects and unanchored inflation expectations seem to gain traction in the GC as the March minutes showed, with the hawks becoming increasingly vocal about the risk of a wage-price spiral if monetary policy did not act in a timely manner. The minutes show that the ECB do not see stagflation, but call it slowflation. Already in March, a large number of GC members thought that the persistently high inflation rates called for further steps towards monetary policy normalization, as the three forward guidance conditions for interest rates increases had either already been met or were very close to being met. Similarly to the Fed, the uncertain economic outlook following Russia’s invasion of Ukraine was the main factor leading the GC to refrain from a more accelerated policy tightening at the current stage, with lingering doubts about the role of temporary, pandemic-related factors and the indirect effects of higher energy prices.

Fed: Fed’s Bullard was confirming his general hawkish views by favoring that the ‘committee to get to 3-3.25% on the policy rate in the second half of this year’, hence above their own perceived neutral rate. He would also support a 50bp rate hike in May. Markets are currently pricing in another 215bp worth of rate hikes this year.

Equity: Global equities flat yesterday after a rollercoaster session in both US and Europe. While US ended close to day high, Europe ended close to day low. Hence no surprise to see European futures stronger than the US futures this morning. Defensives in another massive outperformance yesterday as investors are not willing to go into bonds but at the same time too worried about the economic outlook to buy cyclicality. Value outperformed growth for the third day in a row as yields drifted higher. In US yesterday Dow +0.3%, S&P 500 +0.4%, Nasdaq +0.1%, Russell 2000 -0.4%. Asian markets are mostly higher this morning with China underperforming as Covid and weak macro data are pressing relative performance.

FI: European rates traded mostly sideways until the release of surprisingly hawkish ECB minutes covering the March meeting, which sent German yields some 6bp higher, before some retracement was observed. The intra-euro area spreads moves were relatively benign in this regard and ended broadly unchanged on the day. The European curves pivoted around the 5-10y point which has been relatively exposed recently to changes in economic outlook and to policy signals. The clear underperformer of EGB spreads was France which ahead of Sunday’s first round French election had a poll putting Le Pen ahead of Macron in a head-to-head second round election on the 24 of April. A Le Pen victory would send EGB spreads wider to Germany on outlook of a stall to further EU integration to which Macron has generally been a wide supporter.

FX: A hawkish ECB may be a mild positive for EUR/USD on the day of the upcoming ECB meeting but not a long-term game changer for our view of spot going towards 1.05. For EUR/CHF, FX currency reserves data out yesterday suggested no signs of SNB intervention.

Credit: Sluggish market sentiment on Thursday carried over to credit, which saw a slight widening in the synthetic Investment Grade and High Yield indices. Itraxx main widened 0.9bp to close at 76.6bp, while Xover was 6.0bp wider, closing the day at 365.5bp.

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