With lots of speculation floating around regarding cross-Atlantic gaps and policy divergence, the need to fine tune the messaging, telegraph potential “tweaks” and calibrate expectations is readily apparent.
Which is why the following from Reuters probably shouldn’t come as a surprise:
- ECB policy makers wary of changing their message before June, Reuters reports citing unnamed officials.
- One ECB person said to say message of March 9 press conference was over-interpreted
- Further increase in bond yields would be problematic for ECB: officials cited as saying by Reuters
- An official says difficult to signal that an increase in the deposit rate back to zero would be just a one-off: Reuters
Right. And with rate differentials narrowing thanks in part to falling Treasury yields, you probably don’t want to go too far with the hawkishness if you’re the ECB unless you want to end up giving folks more reasons to be long EURUSD. Given the above, I’m sure you can guess when those headlines hit:
As Bloomberg notes, “bund futures spiked to session highs after report on ECB view.”
Well given that, consider the following chart from BofAML which shows that no matter how dovish the ECB may want to be, it’s getting harder and harder to explain this based on anything other than a desire to avoid market turbulence:
Here’s some additional color:
While US rate hikes are likely proceeding, the rate hike debate in Europe is awakening. Over the past months markets have witnessed more rate hikes than rate cuts, for the first time in six years. Currently markets are likely pricing in the high possibility of another two rate hikes in the US this year, but also a roughly 40% probability of rate hikes from the BoE and the ECB. The broad based risk-on, over the past couple of weeks across European risk assets, has increased risks that should the political uncertainty ease post the French elections, rate hike newsflow will continue to grow