ECB: A 25 Basis Point Hike Carved in Stone?
The next ECB meeting is coming up on Thursday and this morning two crucial data points were released. Eurozone core inflation saw a slight decrease in April from 5.7% to 5.6%, marking the first decline in 10 months. This is a positive sign that core inflation is heading in the right direction. Meanwhile, the ECB's bank lending survey indicated that credit standards "tightened considerably" in Q1. This shows that the ECB's monetary policy, which includes rate hikes and quantitative tightening, is starting to have an impact on the system. Source: Bloomberg
The Fed balance sheet is shrinking again
Over the last 4 weeks, the Fed’s balance sheet has reversed 36% of the post-SVB liquidity injections ($392 billion) with a total decline of $141 Billion. Source: Charlie Bilello
Inflation remains hot in the UK, lifting prospects for interest-rate hikes
Britain’s inflation rate remained stubbornly high at 10.1% in March. The pace was driven by the strongest increase in food prices in more than four decades. Economists had expected a slowdown to 9.8%. Traders ramped up bets on further rate increases from the BOE as the double-digit reading provided a wake-up call for investors who thought the tightening cycle was close to over. Source: Bloomberg
The European rate market sends a signal to the ECB!
For the first time in this rate hike cycle, the German 2-year yield is below the ECB deposit facility rate. Furthermore, the difference between the German 2-year yield and the ECB deposit facility rate is at its lowest level (-0.53%) since 2008. Another market signal of an ECB monetary policy mistake? Not sure, considering the current level of inflation in Europe. Source: Bloomberg
No Fed hike in March ? Seriously ??
The U.S. Treasury market is repricing all of the weekend's news regarding the SVB story. The result is a massive steepening of the U.S. yield curve, where the front end has massively outperformed the back end. Goldman Sachs is the first bank to declare that the Fed will not raise rates at its March FOMC meeting. Is the Fed's pivot back? Source: Bloomberg.
Traders see half-point Fed hike in March as more likely scenario after hawkish Powell
Fed Terminal rate now at 5.6% - via Bloomberg and HolgerZ
Today is 1st of March: ECB Passive Quantitative Tigthening (QT) begins
From today onwards, the European Central bank (ECB) will reduce the size of its balance sheet by €15bn per month (until June). ECB assets currently stand at €9T, of which government bonds €5T. Markets swallowed an effective net debt supply of €280bn in 2022, but with QT 2023's it balloons to + €600bn. Source: Bloomberg, Valery Tytel, Gustavo Philippsen Fuhr
The market now expects the ECB to raise its key rate at the highest level ever!
As reflected in the European swap market, market participants expect the ECB to raise its key interest rates to a level never before seen. The terminal rate is expected to be close to 4%, up from 3.75% in the early 2000s. Interestingly, for the first time in this cycle, the markets believe that the terminal rate will be reached in 2024 (and not in 2023). Higher rates for longer? Source: Bloomberg.
