Markets Wager European Central Bank Rate Hikes Are Over

Money markets are betting the ECB is almost done tightening monetary policy after their latest hike.

(Bloomberg) — The message from markets is clear: the European Central Bank is done raising interest rates.

Within minutes of the central bank’s 10th straight increase on Thursday, traders were betting another hike was increasingly unlikely. The euro sank to the lowest level since May as the prospect set in, and bonds rallied, with Italy’s debt leading the advance.

“The main takeaway is that the ECB are done hiking rates,” says Tim Graf, head of EMEA macro strategy at State Street.

While ECB President Christine Lagarde said it was impossible to call a peak in rates, money managers polled by Bloomberg are in near-universal agreement, pointing to a fresh raft of gloomy economic forecasts that mean further hikes would pile on more pain. 

Here are a selection of their comments:

  • Mike Riddell, global macro portfolio manager, Allianz Global Investors
    • “This looks like a dovish hike. Growth forecasts are lower, and wording suggests this could well be the last hike.”
    • “This hasn’t changed our view on European bonds — it makes bunds look OK value, but the yield pick up on anything that’s not core doesn’t look sufficient, given the euro zone’s deteriorating growth outlook.”
  • Mike Bell, global liquidity market strategist at J.P. Morgan Asset Management
    • “The ECB are probably done hiking… Against the weaker growth backdrop, the ECB can probably pause at the next meeting and if the growth outlook continues to deteriorate a pause could morph into a peak.”
    • “However, unless unemployment rises sharply and rapidly, the outlook for euro zone interest rates could end up looking like table mountain with rates on hold for quite some time.”
  • Mark Wall, chief European economist at Deutsche Bank
    • “A lingering pause is being signaled, but it’s a low conviction pause. The ECB has retained the option to hike further if necessary. There is no declaration of victory on inflation.”
  • Ugo Lancioni, head of global currency at Neuberger Berman
    • “It is clear that much weaker data in Europe is having a greater impact on their decision.”
    • “The revisions in economic forecasts do not justify much more aggressive tightening.”
  • Piet Christiansen, chief strategist at Danske Bank
    • “Lagarde’s reference to rates “Maintained for a sufficiently long duration” should in my view be read as ECB pushing back on any thought on imminent rate cuts as well.”
    • “I don’t see ECB liking the expected easing that is priced by markets.”
  • Gurpreet Gill, macro strategist, Global Fixed Income, Goldman Sachs Asset Management
    • “The ECB delivered what we expect to be the final rate rise of its cycle. With the exception of the surprise timing of its concluding hike, the accompanying guidance for a prolonged pause, ongoing dependency on data and the evolution of economic projections were all in line with our expectations.”
  • Dominic Bunning, head of European FX research at HSBC
    • “While the ECB may well try to push a “higher for longer” mantra for its rates outlook, for the euro it seems clear that the path is now “lower for longer.”
    • “With the ECB now at its likely peak rate, the rates market should start to lean towards pricing cuts as the next move — albeit not necessarily to be delivered any time soon. A shift lower in EUR rate expectations from here, alongside the potential for US rate cuts to be priced out of the market, makes downside potential for euro-dollar most compelling. We see a decline to $1.02 over the next nine months.”
  • Sonja Marten, head of FX and monetary policy at DZ Bank
    • “The press conference maintained the dovish tone of the statement, which has kept EUR/USD under pressure. This is unlikely to change in the very short term.”

–With assistance from Jana Randow, Dayana Mustak, Alice Atkins, Alice Gledhill and Greg Ritchie.

(Updates with investor view.)

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