EUR Swaps: Steepening on 25bps view; One more, no more?

Casino chips 1 23 Nov 2020
As the market prices in a 29bps hike and braces itself for ECB headlines and the Lagarde lottery, strategists look ahead to future ECB actions.

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  • Steepening move illustrates 25bps expectation

  • BNPP: One and not done

  • Commerz: Oil dip raises chance of ‘one more, no more’

  • New issues


    Steepening move illustrates 25bps expectation

    Market consensus has coagulated around the ECB hiking 25bps today, after inflation-fuelled expectations of a 50bps hike ran out of steam in recent weeks after the SVB-related panic and some signs of easing inflation pressures started to emerge. ECB €STR forwards currently price only the slim chance of a 50bps move.


    Presumably that means from a fixed income perspective that if there is to be a surprise it will be a bearish one for the front ends of EUR fixed income markets in the form of a 50bps hike. For now the curve is reflecting the majority benign expectations for today with the Bund curve steepening about 6bps on a 2y30y basis with yields in the 2y sector -2.5bp on the day while EURIBORs are -1 ticks in the whites and +3-4 ticks in the reds.


    Asked about the outlook for the rest of the day, one swapper said “our house view is +25bps, and the market is pricing in 29bps, so yes… a 50bps move would be a shock but we will just have to wait and see.”


    Activity was described as moderate by most traders this morning though price action has been mildly choppy. The Schatz to be fair has mostly traded in a  2.60-2.63% range today but traders said that hefty long-dated supply of 2039, 2052 and 2074 OATs as well as 2040 SPGBs was weighing on the long end, along with ECB expectations, on what would ideally be a quiet morning session supply-wise.


    “The long end’s traded a bit heavy since the auctions,” said one swapper noting that 30y Bund yields have shifted from 2.38% to 2.42% over the last two hours. "Hedging and positioning volumes have made for decent levels of transactions in Bund futures so far, but what really matters today will come later."


    The likelihood is that if the ECB headlines land on target, with a +25bps hike, the focus will be on whether Lagarde’s subsequent Q&A will emphasise the ongoing threat of inflation, or its receding nature. Or finds herself throwing in a complete curveball, just to make things a bit rowdy.


    We shall soon see, but currently swap spreads at least are keeping things tight with the Schatz ASW unchanged at 83.5bps, Bobl is also unchanged at 75.9bps, the Bund ASW is -0.2bps at 71.5bps and the Buxl is unchanged at 36.4bps. Outright, 2s/10s swaps is 3bps steeper and 10s/30s is up 2.7bps. 


    BNPP: One and not done

    Strategists at BNPP today confirmed that they share the dovish majority view that a 25bps hike will be the likely outcome of todeay’s ECB rate decision. But it won’t be the last such hike, it contends.


    BNPP said that “similarly to the Fed, our economists expect a downshift to a 25bp hike coming out of today's meeting, likely led by the first signs of normalization in core inflation as well as new signs of policy tightening weighing on credit demand, according to the recent EZ's Bank Lending survey. However, we don't expect this to be ECB's last hike of this cycle yet.”


    Why? Because “in absolute terms, underlying price pressures remain strong – the acceleration in services inflation is a case in point. As a result, we don't think the ECB's job is done yet and reaffirm our view of a terminal rate of 3.75%, which we expect to be reached in July.”


    Commerz: Oil price slip raises chance of ‘one more, no more’

    Strategists at Commerzbank were today a little more dovish than their peers at BNPP, suggesting that the impact of falling oil prices supports the possibility that this will indeed be the last ECB hike of the cycle.


    Commerz said that the ECB is “facing a delicate meeting. The latest data (HICP, BLS) combined with fragile risk-sentiment add weight to our expectations for a smaller rate hike of 25bp today and with forwards discounting 28bp as per yesterday's close relief for the front-end should be limited following the recent rally.”


    “With no new staff projections to be presented today, Lagarde will continue to insist that more needs to be done in face of sticky core HICP and - more important - that the ECB deems the €-area economy as sufficiently resilient to allow further tightening.”


    And yet…. continued Commerzbank, “the door for hikes is closing with even a terminal rate of 3.75% no longer being discounted in full, while the latest oil sell-off through the March lows implies additional (downward) pressure on HICP and shorter-dated inflation expectations.”


    Summing up its view, Commerzbank said “With the Fed all but done, the ECB will probably struggle to revive terminal rate expectations with the oil implosion adding to market conviction.”


    New issues

  • Copeland (Emerson Climate), a German manufacturer, plans EUR ($500m equivalent) long 7y NC3 at around the 6.5% well as $2.25bn long 7y NC3. Pricing expected today. Leads include Barclays (B&D), RBC, WFS, GS, BNPP, JPM and Mizuho.

  • Sparkasse Pforzheim Calw yesterday priced a €500m 6y Covered at swaps +11bps through Commerzbank (B&D), Deka and Helaba.

  • LB Schleswig-Holstein yesterday priced a €650m 5y at swaps -8bps through Commerzbank, DZ, GS, Helaba and UniCredit (B&D). It came at swaps -8bps.