ECB turn of the screw: our take of the market’s reading:
- We are now inclined to believe that, although the timing for the first rate hikes has been significantly brought forward from our base case before the ECB meeting, we still think it unlikely that the ECB will be in a hurry to act immediately: we now consider that 1Q23 is the most likely scenario for the first Deposit Facility rate hike, although at this stage and given the strong conditionality on the data, a first action in December 2022 cannot be discarded.
- If the new base case scenario is one centered on the APP net purchases only extending until 3Q22, it would increase the net recourse to markets by sovereign issuers this year by around c.EUR100bn according to our estimates.
- The “data dependency” of the ECB’s next decisions does nothing but add to the uncertainty concerning the market’s approach as in the very short term it appears unlikely that the data flow will allow the market to abandon the “hawkish alert mode now in force”. Volatility in yields in either direction (but probably more biased to the upside) will continue to be the name of the game.
- Curve direction wise, we cannot discard some extension of the bearish movement: our target for the Bund yield for 1Q22 now stands at 0.30% ( 0.70/0.80% for 10Y swap), whereas this would be around 0.40/0.50% for 2Q22 (0.80/0.90% for swap). We now expect Schatz yields to consolidate at levels above -0.30% and eventually test waters close to -0.20% (consistent with 2Y swap range bound around 0.10/0.20%. In any event, any inroads into higher references would represent an overshooting to us
- Peripheral asset valuations are in an adjustment phase and, consequently, the pain may extend for longer: we see a new range for SPGB-DBR of 80/90bp (albeit probably not significantly above) over the next few weeks as we wait for the dust to settle, and an extension of this range to 100/110bp in 2H22 (but probably not higher). BTPs high-Beta nature is now in full deployment: our targets in any case are not catastrophic enough, as the spread should remain relatively contained to close but below 180bp. Under this new (less accommodative” ECB scenario, Portugal may lose the “lead” it has so far enjoyed vs. its peers.
Periphery recap: A more hawkish than initially expected ECB drove a strong upward movement of yields and peripheral spreads widened. Regarding issuers, not surprisingly Italy has been the most impacted curve and Portugal and Spain had similar performances, with a slightly stronger performance of SPGB in the short end and belly of the curve and with PGB’s long end doing better than SPGB.
Regarding sectors, the belly and long end of the curves were significantly impacted while the long end of the curves remained more anchored. This performance led the 10Y30Y slope to visit lows not seen since March 2020.
Weekly supply: Netherlands, Germany, France, Spain, Belgium and Italy will be active on the bills market, where total gross issuance would be c.26.40bn in gross terms (EUR10.49bn in net terms) during the week. On the bonds market, Germany, Portugal and Italy will be active and total gross (and net issuance) will be c.EUR9.70bn during the week.