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Following ECB 50bps hike
French benchmark 10-year Notionnel OAT Yields fell to 2.5%, tracking sharp decline of European bond yields
Approaching 5-week low 2.45% on January 18thYield on Italian 10-yr BTP sank below 4%, tracking other neighboring bond yields after ECB Hike
– Spread between 10-year BTP and German #Bund narrowed to lowest since April at 170bps to signal lower credit risk relating to Italy’s high debt.
The statement and Lagarde’s presser gave us guidance for the May meeting is hazy and some may have expected comments regarding the bank’s intention to accelerate QT in the third quarter.
Last meeting Lagarde establishing herself as the biggest hawk among top central bank officials. Already, a few weeks later, she has had to soften her stance—while remaining the top G10 hawk—given the more favorable energy prices backdrop that has quickly rendered the Q4 projections as NOT correct.
Market pricing for the bank’s terminal rate is lower by about 15bps and contracts are now seeing a peak deposit rate of 3.50% in June equivalent to hikes of 50, 25, and 25 in March, May, and June, respectively.
With no comments around an accelerated QT pace in Q3 and the softer policy outlook from the ECB today, Italian yields were sharply lower across the curve.
Yields on 2-yr German bonds are down 15-20bps compared to 25-30bps in Italy. In the 10-yr space, BTP yields are down 40bps compared to 20bps in Bunds for an 20bps decline in the spread between these two to about 180bps, correcting an important share of the widening seen since mid-month.
Traders may have anticipated that the ECB would speak to a faster QT in the second half of the year, maybe it was too much to hope for a faster QT when QT hasn’t even begun (March 2023 at a pace of €15/month until June)
With the Lagarde stuttering still anticipate a 50bps hike in March with risks tilted towards a quarter-point increase in May to be followed by a final equivalent hike in June. The ECB remain data-dependent and cannot yet confidently bank on inflation pressures not remaining elevated in coming months—but a continued negative trend in headline inflation even if accompanied by stubbornly high (but cresting) core inflation has a calming effect on wages pressures and the risk perception of policymakers.
With several months’ worth of data until mid-year that could show continued declines in inflation, as expected, the bank may find little motivation in hiking again three meetings from today and instead choose to hold its fire in June ahead of a long pause.
The European Central Bank’s latest survey on inflation expectations among consumers continued pointing to expectations for 5.0% inflation over the next year. The inflation outlook for a three-year period increased to 3.0% from 2.9%.
European Central Bank policymaker Vujcic said that rates are about to enter restrictive territory and that it is correct to expect a 50-bps rate hike in March while ECB Chief Economist Lane also said that there is a solid case for a 50-bps hike in March.
The European Central Bank is starting to reduce holdings in its Asset Purchase Program portfolio.
ECB policymaker Villeroy de Galhau said that it is desirable to reach the terminal rate by the summer and that growth in France is expected to be slightly positive in 2023.
Eurozone’s February Manufacturing PMI 48.5, as expected (last 48.8)
Germany’s February Manufacturing PMI 46.3 (expected 46.5; last 46.5). February unemployment change 2,000 (expected 9,000; last -15,000) and Unemployment Rate 5.5%, as expected (last 5.5%)
U.K.’s February Manufacturing PMI 49.3 (expected 49.2; last 49.2). February Mortgage Approvals 39,640 (expected 38,000; last 40,540). February Nationwide HPI -0.5% m/m (expected -0.4%; last -0.6%); -1.1% yr/yr (expected -0.9%; last 1.1%)
France’s February Manufacturing PMI 47.4 (expected 47.9; last 47.9)
Italy’s February Manufacturing PMI 52.0 (expected 51.0; last 50.4)
Spain’s February Manufacturing PMI 50.7 (expected 49.1; last 48.4)
Swiss February procure.ch PMI 48.9 (expected 50.4; last 49.3) and January Retail Sales -2.2% yr/yr, as expected (last -3.0%)ECB raised key rates by 50 bps in its February monetary policy decision following a 50-bps rate hike in December, and matching expectations from most
[See the full post at: ECB Raises Rates Another 50bps, Banking Sector Resilient]
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