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ECB, rates and BTPs: Lagarde waiting at the gate

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ECB, rates and BTPs: Lagarde waiting at the gate

ECB-Day: first act 2023 by Christine Lagarde on rates, and therefore on the economy of the euro area. Here we are.

In the aftermath of Jerome Powell’s Fed announcement, it will be Lagarde’s turn to churn out, once again, the bazooka against the growth of inflation: a bazooka made up not only of monetary tightening but also, as in the case of the Fed, of the instrument which threatens to shake up the BTP market: the QT, Quantitative Tigthening, contrario al QE, Quantitative easingwhich in recent years has seen the Eurotower engaged in sovereign debt shopping.


Quell’was about to close, as announced by Lagarde herself last December 15, when her last act of 2022 caused several headaches in the political world, especially in Italy. In mid-December the ECB surprised everyone (but the move was not so unexpected), giving indications on times for disinvestment of that quantity of debt securities which floods its balance sheet

“The Governing Council intends to continue to reinvest, in full, the principal payments from maturing securities repaid under the APP until the end of February 2023. Subsequently, the APP portfolio (technical term for QE) will be reduced at a measured and predictable pace, as the Eurosystem will only partially reinvest the principal repaid on maturing securities. The rate of this reduction will be on average a 15 billion euros per month until the end of the second quarter of 2023 and will then be determined over time”.

In less technical terms, it can be said that the ECB will begin to pull the plug on the BTPs and other debt securities it has been shopping wildly starting in March 2023—unless program changes are announced tomorrow.

Inflation and GDP: the situation in the Eurozone

Everything revolves around the question that also worries us in these hours Jerome Powell’s Fed: where are we with inflation, in this case in the euro area?

Another equally important question: How is GDP growth in the Eurozone?

Answers to these questions have arrived in the last few sessions, with a roundup of macro data: the preliminary data relating to the Pil dell’area euro have shown that the picture is less gloomy than feared.

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The preliminary data of the preliminary GDP released by Eurostat has in fact highlighted that the Eurozone grew at a rate of +0.1% in the fourth quarter of 2022. Although with an anemic trend to say the least, GDP contradicted economists’ estimates, which were for a contraction of 0.1%.

Well on the one hand, not so much on the other. In fact, the ECB could believe that, since the area’s economy is more resilient than expected, further monetary tightening may not cause any major trauma.

But inflation?

Today, from the preliminary numbers just released, it emerged that, in the month of January, Eurozone headline inflation was 8.5%a marked slowdown compared to +9.2% in December.

Once again, energy prices were confirmed as the component that fueled inflation most of all: the trend, however, slowed down, given that the growth rate was equal to +17.2% in January, down compared to the +25.5% in December.

On the other hand, the debit component accelerated upwards food prices, which rose from 13.8% in December to 14.1% in January.

Not only. L’core inflation, which is increasingly gaining the attention of Lagarde & Co. remained unchanged at 5.2%.

And, as Jack Allen-Reynolds, senior economist in Europe’s division of Capital Economics, points out to CNBC, “the key factor is that core inflation has remained unchanged at a record 5.2%. And that means the ECB will remain very hawkish.”.

Allen-Reynolds stressed on the other hand that, if “The apparent drop in January’s Eurozone headline inflation came as a big surprise, slowing from 9.2% in December to January“, it is also true that we wouldn’t be shocked if the same figure were revised upwards even significantly on the occasion of the publication of the final data of the Eurozone, scheduled for February 23rd”.

The problem is not in the imminent rise in interest rates in the Eurozone, which should materialize tomorrow, with a widely expected tightening of 50 basis points.

The question is what he will decide to do Christine Lagarde’s ECB later. For now, the economist community expects an increase (rates) to 3.5% (from 2%) by the end of the first six months of this year, according to a Reuters survey. However, they are not lacking decidedly more hawkish forecasts, such as that of Nouriel Roubini, among other things in a moment of high tension between the Italy of the Meloni government and the ECB of Christine Lagarde.

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For Italy, in particular for the BTP-Bund spread and the BTP rates, and in the long term for the fate of Rome’s public debt, the hope is that there will not be an encore of the Christmas trauma, when the BTP rates at 10 years they have also exceeded the yields of Greek bonds and the BTP-Bund spread shot up over 200.

Blame not only and not so much the rate hike but the end of free time for BTPs, with the announcement of the anti-inflation bazooka QT-Quantitative Tightening.

The double slap – in reality not only to Italy, but to the entire euro area if we want to talk about this – has unleashed the anger of a some Italian politics.

So Morgane Delledonne, Head of Investment Strategy Europa di Global X:

The ECB raised rates more gradually than the Fed last year, probably contributing to a less marked economic slowdown than in the US. Better-than-expected economic data, despite stubbornly high inflation, will likely prompt the ECB to continue raising interest rates by 50 points at least at this meeting. But if the ECB meeting is likely to be in line with expectations of a 50 basis point hike, a decisive hawkish positioning by President Lagarde could surprise the market”.

I consider the ECB’s tightening cycle – continued Delledonne – she will conclude after the Fed’s one, as underlying inflation pressures in the euro area are only now starting to take effect and the ECB will have to work further to bring inflation back towards target. In my opinion, euro area interest rates could rise by another 150 basis points by mid-year before we reach the peak of this tightening cycle.”

He is also anticipating the moves of the ECB François Rimeu, Senior Strategist, La Française AM:

The ECB can be expected to raise interest rates by 50 basis points, bringing the deposit rate to 2.5% and the Refi rate to 3.0%. We expect the Governing Council (GC) to reiterate that interest rates still need to get tight enough and remain high enough for inflation to fall to 2% in a timely manner. It can be expected that the President of the ECB, Christine Lagarde, will reconfirm the approach of a calibrated monetary policy. Furthermore, it is possible that she will communicate that the pace of policy tightening will be reassessed at the March meeting, following the update of the economic projections ”.

Rimeu writes in his note that “we don’t expect that Christine Lagarde reiterates that “Based on the information we have today, we can assume another 50 basis point rate hike at our next meeting.” Ma we expect the ECB to announce the details of the Quantitative Tightening (QT).”

And it’s these two simple letters, QT, which frighten Italy even more, in what is seen as an anti-BTP and anti-euro area government bond move, which some might define addicted to all the monetary drip granted in recent years by the Eurotower.

The Governing Council will likely seek to maintain strong communication to prevent inflation expectations from falling apart. However, with falling energy prices, a rising euro and a worrying bank lending survey, it will be difficult to deliver the same message at the next meeting in March. We expect interest rates to fall after this week’s meeting.”

In short, the hypothesis that the ECB may find itself forced to retrace its steps in an all too abrupt manner continues to be present.

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On the other hand, several economists indicate that the picture of the euro area economy is better than estimates and that precisely for this reason Lagarde would have more room to continue fighting against inflation.

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