EUR Swaps: ECB knife-edge; Traders ask will they or won't they?

ECB Lagarde 9 Jun 2022
Today's ECB decision is on a knife-edge as traders ask will they or won't they in the wake of the Credit Suisse fallout.

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  • Traders ask -  Will they or won’t they?
  • EMMI plans reform to Euribor Level 3 Contributions

    Traders ask - Will they or won’t they?
    The Bund is down over a point and the Euro Stoxx up 1% after Credit Suisse secured a funding deal from the Swiss central bank.

    “Markets definitely feel calmer now,” said one London-based trader, “But it depends what the ECB does. There are 38bps of hike priced in, exactly between 25 and 50bps. I suspect they will go 50bps.”

    This, he says, is because, “They do have previous history of focussing on inflation irrespective of problems elsewhere. They hiked in 2011/12 when Greece was going underwater and they may well take the view that the SNB has provided liquidity to Credit Suisse, so it’s not a problem they need to worry about.”

    If the 50bps hike is forthcoming, the trader reckoned, “It could cause a bit of a reaction. I sense the market is a little bit nervous about exactly that and was rather wishing the Fed was going first in this round of central bank rate decisions as it is more removed and sounds as if it would be a bit more likely to set the tone by taking the cautious approach.”

    In latest strategy notes, some analysts have revised their predictions and most are also focused on the ECB's plans (if any) for contingent liquidity facilities or operations etc to support the financial sector in the event or renewed volatility:

    Barclays: “An extreme event requires a reassessment of our ECB call… At the current juncture we think that the Governing Council is more likely to announce an increase of all policy rates by 25bps, which we see as the highest probability outcome, rather than 50bp or no hike, to which we would ascribe lower but equal probabilities.”

    BofA: “We see two almost equally balanced scenarios for today's ECB rate decision: (1) a 50bp hike with very little guidance on the path ahead, vs (2) a 25bp move (or even a pause) but with a hawkish message on the need for further tightening. We still believe the first scenario is, at the margin, more likely.”

    BNP Paribas: “Our base case remains for a 50bp hike at Thursday’s Governing Council meeting. But with the fallout from Silicon Valley Bank now spilling into the European banking system to a greater extent, the case for a 25bp move has become stronger. We would consider a pause as unlikely. In any case, the risk of a communication misstep is high. The ECB is stuck between a rock and a hard place. As for markets, we think news related to the banking sector will drive the price action across asset classes.”

    Commerzbank: “The ECB is in no enviable position. Given the speed and magnitude of moves, the market environment this morning will probably be a material factor in the Council's decision. Although we are also leaning towards 25bp we see higher odds for 50bp than the market. Even in case of a 50bp hike, however, hawkish sentiment seems unlikely to return for good as an imminent fix to restore market confidence is not in sight at present.”

    Societe Generale: “The turmoil engulfing the financial sector has diminished the likelihood of a 50bp rate increase. Like the Fed next week, 25bp cannot be ruled out. A pause is unlikely. President Lagarde did hedge her bets at the last meeting in February when pressed on the near certainty of a 50bp hike in March, but the emergence of tail risks in the financial sector means a smaller 25bp increase but with hawkish caveats could be more appropriate. A smaller increase does not necessarily mean the terminal rate will be lower and period of restrictive policy shorter than previously anticipated.”


    EMMI plans reform to Euribor Level 3 contributions
    A newsletter published earlier this week by EMMI reveals it has initiated “an ambitious project” to reform the calculations of Euribor Level 3 contributions. It writes, “We are fine tuning and analysing thoroughly our favoured scenario. Market participants – and all relevant stakeholders – will of course be consulted in due time to collect their feedback.” Further details can be found here.