Announcements
The ECB announced a 25bp hike in all reference rates today to leave the Deposit Facility rate, the Main Refinancing Operation rate and the Marginal Lending Facility rate at 3.50%, 4.00% and 4.25%, respectively, in a decision that is in line with general expectations.
The ECB confirmed that the reinvestment of the APP will be discontinued from 1 July (APP 100% roll-off). This entails a volume of debt of c.EUR150bn that will not be rolled over between July and December 2023, which will add to the c.EUR60bn already scheduled in the March-June period for a total of c.EUR210bn in FY2023. Of this amount, the public sector securities (PSPP) roll-off would make up c.EUR120bn in 2H23 (c.EUR170bn in FY23).
Forward guidance
Barring any material change in the baseline scenario, is that it is very likely the ECB will hike rates again in July. Full stop, end of story. Regarding the rest (and it is not relevant to scrutinise the very next steps but definitely is for the medium-term outlook for the ECB’s policy) a clear hawkish underlying message was evident. the context depicted today is consistent with our view that the strength and resilience of the underlying price pressures will warrant the tightening strategy be kept for some time before reversing
ECB’s assessment of the macro context
The inflation outlook still features “too high for too long” with prevailing upside risks. This message that there has not been enough improvement in inflation risks was reinforced by the increase in the staff projections for inflation. Looking at this in more depth, the resilience of core inflation is not only assigned to the phasing in of past inflation surprises (mostly related to energy) but also to the ongoing pressure deriving from the robust labour market.
We note that this increase in the inflationary outlook vs. the March forecasts is combined with the maintenance (at least not any significant deterioration) of cyclical insights.
Market reaction
The first and most obvious reaction has been the full pricing of +25bp hike in July and c.15bp in September. Equally as important, the market has to some extent adopted a less dovish stance on the mid-term perspectives.
This has also been reflected in the short tenors of the swap and government curves ( first reaction of c.13bp uptick in the 2Y area lately moderated to +8bp). For its part, in a rather volatile context, the mid- and long-tenors have remained virtually unchanged vs. pre-ECB levels. We still maintain our view that there is further upward room for nominal and real long-term rates in the Euro curves
Peripherals approach
The overall performance of peripherals vs. core paper was virtually unchanged during Mme. Lagarde’s press conference, confirming the level of widening observed in the Italian bonds this morning (vs. Bund), the relatively stable performance of SPGBs and, on the flipside, the tightening of PGBs. More than the spread dynamic, it is interesting to note that the outcome of today’s ECB meeting led to a flattening in the 2Y-10Y area, both in absolute terms and vs. the German curve. Looking ahead, the overall feeling is that market participants are playing the European sovereign market with a convergent approach both on credit spreads and in terms of credit curve slopes (leading to a flattening in the Italian credit curve in the 2Y-10Y area as well as in the Spanish and Portuguese curves in the 10Y-30Y area).