ECB, BTP rates and inflation: what’s happening
Inflation in the euro area slows down, but remains stubbornly high, and what is increasingly frightening is core inflation, on which Christine Lagarde’s ECB is increasingly shifting its attention.
All this while, in this week that is drawing to a close, traders have bet for the first time on a Eurozone terminal (final) rate of 4%.
Yesterday, in reality, following the publication of the Eurozone inflation data (and inflation in Italy), interest rates on BTPs and other sovereign debt in the euro area have fallen by maximum tested on the eve.
In particular, the rates of 10-year German Bunds, according to Reuters data, returned to 2.715% after having jumped to the record since July 2011, at 2.77%.
Today, in a market that increasingly focuses on the positive effects of reopening of China but also on the macro data arriving from the Eurozone Bund yields edged back up to 2.744%, after the strongest weekly outburst this week since last December.
New information has arrived from the macroeconomic front of the euro area, with the publication of the PMI indices. Pay particular attention toEurozone PMI Composite Index compiled by S&P Global, considered a thermometer of the health conditions of the euro area economy.
The PMI index rose to record of the last eight months at 52 points, after 50.3 points in January, slightly below the 52.3 points of the preliminary numbers, but expanding (as it is above 50 points), for the second consecutive month.
A “good news” which for BTP & Co. however is “bad news”, as it risks further convincing Lagarde to push on new rate hikes.
Not only BTPs and Bunds, rates boom in France, Spain, Ireland, Portugal
The ECB interest rate anxiety is confirmed by the yield trend not only of BTPs and Bunds, but also of interest rates government bonds of France, Spain, Portugal and Ireland which, again according to Reuters data, have in recent days tested the highest levels of the last decade, if not beyond.
French bond rates, in particular, have flown in recent sessions to the highest value since mid-January 2012;
those of sovereign debt Spanish travel to the highest levels since January 2014, while the yields of Portuguese and Irish government bonds they hit, respectively, the records since April 2017 and February 2014.
Always this week two-year Bund yieldsclosely monitored as they are more sensitive to changes in ECB monetary policy expectations, shot up to 3.257%, the highest value since October 2008.
The rise in BTP rates but also in Bund rates meant that the BTP-Bund spread remained under control, around 180 basis points, against of rates on 10-year BTPs which, after flying to their highest level in the last two months at 4.645%, have returned to make an about-face.
But on the money markets, precisely, the novelty is that traders have started pricing a terminal rate, in the Eurozone, equal to 4%.
What is certain is that the fear of new aggressive rate hikes by the ECB was once again confirmed as a protagonist, this week, in the wake of the new statements arrived from the exponents of the Governing Council of the ECB, president Christine Lagarde in the first place, willing to raise rates even beyond the already pre-established and discounted monetary tightening – of 50 basis points – of the upcoming meeting on 16 March.
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The fear was also triggered following the roundup of macro data from the Eurozone.
There was also the effect of news from the US-made fixed-income market, where, for the first time since November 2022, 10-year Treasury rates have exceeded the psychological threshold of 4% and 2-year Treasury rates, now close to 5%, shot up to record since 2006, i.e. in 17 years.
In the last few hours, the statements of the president of the Atlanta Fed Raphael Bostic have dampened the high tension on the fixed income market.
That said, in yesterday’s session, for the first time, the Fed funds futures they bet on a US terminal rate of 5.5%.
Even in the Eurozone, anxiety has subsided, at least in the last few hours, in a context however in which rate bets remain hawkish, especially after the publication of the euro area inflation data.
In this regard, in the note “European inflation, the data push towards a new monetary tightening” Robert Schramm-Fuchs, Portfolio Manager di Janus Henderson, commented as follows:
“Eurozone overall inflation fell 0.1% less than expected to level all’8,5% su base annua. The only factor driving the decline was the decrease in energy inflation, which we must view with caution given the vulnerability of the global supply-demand balance due to structurally high supply tightness, China’s reopening of demand growth and geopolitical risks.
This, “while more than 60% of the increase in underlying inflation came from the increase in services inflation, which tends to be quite persistent. The contribution of goods inflation to underlying inflation was smaller, but the increase itself came as a positive surprise, thanks to the recent decline in energy and transport prices and the general easing of supply chain bottlenecks. .
According to Janus Henderson’s portfolio manager, the figure highlighted that “core inflation in the Eurozone, excluding energy, stands at rates very similar to those in the United States, but the interest rate differential is still quite large”.
Consequently, “we can therefore only reiterate what was written in relation to last month’s data: central banks are certainly not running out of reasons provided by the macroeconomic data to continue their path of monetary tightening“.
And therefore, in the case of the euro area, “the next meeting of the European Central Bank, which will be held in two weeks, should once again be dominated by hawks, given that the inflation data surprised essentially all the main countries of the Eurozone”.
From Janus Henderson also came a reflection on the market trend:
“As far as the equity markets are concerned, we believe that the persistence of inflation and the absence of a central bank momentum continue to lead to an outperformance of value stocks relative to growth stocks with higher valuation multiples, and therefore a continued outperformance ofEurope like value market substantially cheaper than the US stock market. Ultimately, the strong monetary tightening campaign will have a significant impact on the economy, given the customary lag of policy effects, and that will be the time when equities will be free to anticipate not a central bank turnaround, but a pause in the economy. central bank, which should be a good risk-on signal”
He had his say on the Eurozone inflation data released yesterday also Michelle Cluver, Portfolio Strategist at Global X:
“Eurozone inflation data was mostly expected for the consequences on the ECB meeting on 16 Marchwhere markets are currently expecting another 50 basis point hike.”
Cluver also focused oncore inflation, “rising to a new high of 5.6% annually, far exceeding expectations of an increase to 5.3%”.
“The fact that core inflation remains on an upward trajectory – continued the Global X strategist – worries the markets, and probably he will keep the pressure on the ECB in the next meetings”.
“Euro area overall inflation reached a peak in October, at 10.6% per annum, and recorded an improving trend thanks to the easing of inflationary pressures on energy – concluded Cluver- Data from February continued this trend, despite being higher than expected, at 8.5% yoy (vs. 8.2% expected and 8.6% in January). Earlier this week, inflation data from Germany and France had been higher than expected. As a result, this number was expected to confirm lingering inflation concerns. However, the extent of the rise in core inflation it was certainly surprising.”