This time the inflation alert comes from the ECB itself: not from number one Christine Lagarde, which so far has continually reassured markets about the transitory nature of the inflation flare, but from Klaas Knot, governor of the central bank of Holland and member of the Eurotower Board of Directors.
In his opinion, according to Reuters reports, investors need to be aware of the risk represented by rising inflation, in order to avoid adjustments, including market shocks. This, Knot advised, even if price pressures appear temporary.
“The current appetite for risk present on the markets can be supported by low inflation and low interest rates, ”the governor said. Now, Knot continued, “the effects of energy prices on inflation are temporary by nature, as these prices must continue to rise for inflation to rise as well. But inflation is also higher due to the restrictions that have affected the global supply, a factor that could be less transitory ”.
The banker continued:
“I still believe that the increase in inflation is mostly temporary, but we have to take it into account other scenarios, characterized by structurally higher inflation and higher interest rates. If we don’t, in the future, price shocks may fall“.
It is worth mentioning that the boom in energy prices led to euro area inflation in September, to grow by 3.4%, at the strongest pace since 2008.
Record BTP and Bund rates from May, UK effect + ECB alert
The official view of the ECB is that Eurozone inflation will slow down next year, thanks to the weakening of the energy price rally.
Even before Knot’s statements, Eurozone sovereign debt was already under pressure, in the wake of the sell-off that today it hits UK government bonds. This sell off was also triggered by inflation-related comments released over the weekend by Bank of England Governor Andrew Bailey and his colleague Michael Saunders.
The disposals have hit especially short term gilts, in the face of the jump in yields, which have shot to a record since the beginning of 2020.
Also up sharply interest rates on Swiss government bonds, with the ten-year ones which, while remaining negative, have risen to a record since the end of 2018, around -0.067%.
The ten-year German Bund rates they tested their highest since May, advancing more than 2 basis points to -0.116%, after rising more than 20 basis points last month, almost approaching positive territory.
Sales don’t save the sovereign debt of the made in Italy, with the ten-year BTP rates which also rise to a record since last May, exceeding the 0.90% threshold and advancing up to 0.926%.
Markets bet on ECB rate hike in 2022 with chances up to 100%
But they are not “only” the Gilt effect and Knot’s words to unleash the flare-up of returns:
the fears of inflation – and the specter that really frightens bears an even worse name, that of stagflation – were also rekindled by the movements of the money markets, which this morning came to price a rate hike at 100% by the ECB by the end of 2022.
The reference is to the futures sull’Eonia expiring in December 2022, which priced an increase in rates with a probability equal to 100%, at the beginning of trading, and then bet with a probability greater than 80% that rates are raised by 10 basis points, compared to the chance of just 60% last Friday.
The probability of a rate hike in the Eurozone in September 2022 it also rose to over 70%, compared to 50% at the end of last week.
In all this, evidently in the ECB of Lagarde there is a growing number of those who fear that the assumption that this inflation is really transitory is not, in the end, a truth engraved in stone, as Antoine Bouvet, senior strategist in the rates division of Dutch ING also points out:
“Eurozone rates should show greater resilience than US (Treasury) rates but, in the end, inflation is fueling fears even among ECB officials. Against Lagarde, who continues to try to reassure the markets about the inflation trend, the front (of the yield curve) continues to bring forward the date of the first (rate) hike ”.