Investors stepped up their bets Friday on the ECB’s interest rate hike this year, and now see the bank proposing a bigger 50 basis point hike at one of its meetings by October.
Record eurozone inflation of 8.1% in May and widening price pressures added to the cine for big rate hikes from the European Central Bank, with several policymakers saying they were open to a move of 50 instead of the widely expected 25 basis point increases. .
On Friday, the money markets were expecting 125 basis points of increases by the end of the year and 100 basis points by October.
While the ECB is expected to hold four meetings from July to December and begin its rate hike campaign in July with 25 basis points, the latest metrics imply it will move 50 basis points in July, September or October.
Piet Christiansen, chief analyst at Danske Bank, said markets saw a 50bps rise as most likely in September, given that 32bps of rises in July, another 37bps in September and 31 additional basis points in October are integrated.
“It’s really inflation that’s pushing the markets to this point,” Christiansen said, noting the weakness in other data releases this week.
Bets on the terminal rate, or where rates are expected to peak this cycle, have also risen sharply. Markets now price the ECB hike at 1.8% by February 2024, up from 1.5% at the start of the week.
Bond yields also rose, with Germany’s 10-year yield, the bloc’s benchmark, hitting a new high since 2014 at 1.28%. At 11:20 GMT, it was up 3 basis points on the day at 1.26%.
Germany’s five-year yield topped 1% for the first time since 2013 .
The Italian 10-year yield last rose 3 basis points to 3.33%.
Refinitiv prices briefly showed that Italy’s 10-year yield jumped 26 basis points in early trading to 3.56%, with much more modest moves in other parts of the yield curve. Italian. Tradeweb prices showed a similar move.
A trader and an investor said they did not see any specific reason behind the previous decision.
The investor, who spoke on condition of anonymity, said the move was likely driven by low cash bond liquidity on Friday, given this week’s public holidays. Italian bond futures barely moved, the investor noted.
The volatility following this week’s inflation data has put 10-year yields in Italy, among the main beneficiaries of ECB stimulus, on track for their biggest weekly rise since March 2020, with an increase of nearly 45 basis points.
Germany’s 10-year yield, the bloc’s benchmark, posted the biggest weekly gain since March with a 28 basis point rise.
Attention turns to US jobs data later on Friday.
Source: Reuters (Reporting by Yoruk Bahceli; Additional reporting by Sara Rossi; Editing by Sujata Rao)