UPDATE 1-Money markets back to pricing two ECB rate hikes by Dec ’22

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Nov 12 (Businesshala) – Euro zone currency markets on Friday went back on two full European Central Bank rate hikes through the end of next year.

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The bloc’s bond markets, like others, have been volatile in recent weeks, with a focus on whether major central banks will begin raising rates as markets fear inflation is proving less transient than initially expected. Is.

Following the ECB’s policy meeting in October, markets moved into one 10-basis point (bp) rate hike by July 2022 and two hikes by October 2022, but once more policymakers turned against pricing and the Bank of England. After retreating more strongly, he calmed down. Expected rate hike not given after one week.

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But US October inflation numbers came in higher than expected on Wednesday, raising questions about how quickly the US Federal Reserve might need to act.

After going back to price in full ECB increments until September 2022 on Thursday, they went up in price on Friday in two hikes until December 2022.

“I only have one word for it, which is bullshit,” said Peter Chatwell, head of multi-asset strategy at Mizuho.

“But there is a reason why the market is able to price bullshit, because these levels of inflation are not going to turn around until mid-Q1 of next year. By then the market will have to pay the price of the fat tail of potential interest rate results.”

In the broader market, Italy’s 10-year yield rose up to 6 bps, rising above 1% for the first time in a week, and was up 4 bps the previous day.

The risk premium paid on top of German bonds rose above 120 bps, although it remained well below the 135 bps peak it recently reached the height of the sell-off.

Germany’s 10-year yield, the benchmark for the euro area, was down 1 bp to -0.24%.

Meanwhile, analysts are focusing on moves in the swap markets, which investors use to hedge risk, as they saw big moves this week.

For example, the two- and five-year swap spreads are at their highest levels since the start of the pandemic, a sign that markets are becoming risk averse.

Analysts said year-end bond shortfalls should support bond prices, which move inversely with yields, while the swap spread could be more reflective of rate hike expectations and tensions in currency markets.

Mizuho’s Chatwell said that since assets such as Italian bonds are often traded against swaps, the widening in swap spreads was the effect of the second round of Italian spreads.

On Friday, the focus was on inflation.

Several ECB policymakers said euro area inflation could fall more slowly than previously thought, partly due to persistent supply chain constraints, but the ECB should not overreact by removing stimulus too quickly. (Reporting by Yoruk Bahcelli Editing by Mark Potter)

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