Spark Rates: An IPC Does Not Pivot

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By Antoine Bouvet, Senior Interest Rate Strategist; Benjamin Schroeder, Senior Rate Strategist; Y Padhraic Garvey, CFA, Regional Head of Research, Americas

We have published our Rates Outlook 2023: Belt up, let’s go down: After a horrible By 2022, bond markets can expect improved yields helped by higher initial yields and subsequent declines in market rates. Prepare for a reduction in central bank liquidity, more bond offerings and lingering systemic concerns as key themes as well.

The market runs with the IPC and is followed by the Fed hawks

For once the US CPI The statement broke the bad habit of surprising to the upside. And the market quickly jumped on the ‘pivot’ bandwagon, with a further Fed hike of 75bps for December now off the table, and in any case now it looks like the market is turning to discuss whether it could be 25bps instead of 50 bp next month. The terminal rate that the Fed is expected to hit has fallen to 4.87%. Just after the last Fed meeting, this had reached 5.15%. Risk assets rallied on the prospect of slowing inflation and the Fed becoming less aggressive.

At first, Fed officials were quick to dismiss the markets’ optimism.

Early Fed officials were quick to dismiss market optimism. The data was better than expected, but it is only one reading and the monthly core rate of 0.3% still indicates that inflation is well above the Fed’s desired level. Although encouraged by the data, the Fed’s Mester Still seeing a greater risk in tightening too little than too much, Logan and George reiterated that the Fed had more work to do. While the Fed may be moving to a slower pace of tightening as well to better assess the impact of earlier rapid rate hikes, it may not want to point out that it is doing less overall. Indeed, rebounding stock markets and lower market yields easing financial conditions is probably not what you want to see at this stage without more clarity on where inflation is actually headed.

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The lower CPI print was greeted by lower nominal and real yields

CPI

Refinitive, ING

The indirect effect of the easing of financial conditions comes at an inopportune moment for the ECB

The US markets reading saw the 10-year Bund yield fall to 2%, coincidentally the lowest level since just after the ECB meeting in October. The terminal rate price for the ECB also fell to 2.87% from 3% previously. The ECB, however, does not even have the comfort of having at least one encouraging data set regarding inflation that could justify easing financial conditions, which may explain why the ECB hawks became more vocal yesterday. .

We highlight the ECB consumer survey which points to high, if not slightly higher, inflation expectations. The ECB’s Schnabel referred to the further persistence of inflation in his talk yesterday, while noting that the risk of inflation expectations becoming unanchored remains. There is no time for complacency and rates will likely have to move into tightening territory to control inflation. Neutral will not suffice, even as the probability of a recession in the euro area increases.

More signs that collateral shortage is also on the ECB’s mind

In a more technical matter related to the shortage of collateral, the ECB announced yesterday that it was raising its limit on lending with cash collateral from €150 billion to €250 billion. Schnabel commented in a tweet that it was a precautionary measure before the end of the year.

In fact, looking at daily data through September, daily loans against cash never exceeded €100bn, which should be a testament to the rather expensive terms of this mechanism. But markets are also heading into the upcoming year-end from an already much more tense starting point, so this increased support should be taken as a positive sign and further acknowledgment that the ECB is paying attention to market concerns.

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The ECB’s daily securities lending has not reached its ceiling

Daily ECB

ECB, ING

Today’s events and market opinions.

Post-CPI gains in bond markets may persist for a while despite some pushback from Fed officials. Holidays in the US could induce some calm in broader markets, allowing assets to risk takers enjoy the confidence boost from improving inflation for a while. Coupled with positive news from China, that could limit further decline in rates.

However, this is not without risks. Today we will still see consumer confidence from the University of Michigan, including their measure of surveyed inflation expectations. Longer-term expectations look stable, while shorter-term 1-year inflation expectations appear to be rising a bit.

In the eurozone, we will see another busy list of ECB speakers, albeit this time with representatives from both ends of the dove and hawk spectrum. Among others, look out for Holzmann, Lane, Panetta and de Guindos. Also, keep an eye out for the release of the European Commission’s economic forecasts.

In the primary markets, Italy will actively auction new 7-year bonds and take advantage of a 3-year bond as well as a 12-year green bond, totaling up to €8.75bn.

Content Disclaimer

This publication has been prepared by ING for informational purposes only, regardless of the means, financial situation or investment objectives of any particular user. The information does not constitute an investment recommendation, nor is it investment, legal or tax advice or an offer or solicitation to buy or sell any financial instrument. read more.

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Publisher’s note: The bullet points in this article were chosen by the editors of Seeking Alpha.

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