Rates Spark: Rates are seeking new levels to settle
The current market landscape is characterized by ongoing volatility amidst a mix of macroeconomic data and forthcoming US payroll reports, with oil prices expected to play a critical role in shaping interest rates. Per the full note from the Rates Spark segment, we observe an emerging bearish bias towards interest rates, although volatility remains a constant factor driven by energy costs. As central banks continue to manage inflation expectations, the dynamics of the ECB and Fed will be crucial in determining market direction. The desk is particularly focused on the influence of upcoming macro data, especially the anticipated US payroll figures later in the week.
What the desk is arguing
The desk posits that interest rates are currently in flux and on the brink of new levels, largely influenced by oil prices and upcoming US economic data. Per the full note, there is a bearish sentiment prevailing in the rates markets, yet this may fluctuate based on oil movements. With markets digesting substantial macroeconomic data and statements from central banks, we can expect consistent volatility.
Notably, the discussion about inflation reflects a cautiously optimistic outlook, despite last week's inflation readings where core CPI ticked up, suggesting inflation risks may be stabilizing. This dual perspective reinforces the desk's bearish forecast against ongoing higher oil prices, which pose a potential threat to economic stability.
Where it sits in our coverage
Current consensus for USD/EUR pair is pegged around 1.075, with projections ranging from 1.04 to 1.12. According to our coverage, notable firms have respective targets:
This view aligns with the cross-firm consensus, particularly at the upper end of the spread observed, suggesting market sentiment leans towards a more dovish outlook amid a backdrop of potential economic headwinds.
How other firms see it
Generally, there is agreement among firms like jpmorgan and bofa regarding the expectation of fluctuating interest rates within their target ranges. However, opposing views from other entities hint at a more volatile trajectory than their forecasts suggest. Related indicators to monitor include the ECB policy trajectory and US CPI data, as both will significantly impact exchange rates and underlying economic sentiment, particularly shaping the USD/EUR outlook.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Expect heightened volatility in rates as macro data and oil prices weigh heavily on market sentiment.
- 02A bearish bias in rates persists, although upcoming US payroll figures may alter the outlook.
- 03Current inflation risks appear contained, but the pace of economic growth will be a decisive factor going forward.
- 04Market anticipation for a dovish Fed contrasts with long-end rates remaining vulnerable to upward adjustments.
Market implications
Traders should closely monitor oil price trends and the forthcoming US payroll figures due later this week for clearer signals on interest rate movements. A significant response in oil prices could either validate the bearish sentiment or shift the narrative for interest rate expectations.
Risks to this view
A deviation from expected labor market strength could result in a reconsideration of target rates. Should payroll data exceed expectations, or if inflation continues to rise unexpectedly, it would challenge the current bearish outlook on rates.
Articles Rates Spark: Rates are seeking new levels to settle Published 07:21 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Markets have a pile of macro data and central bank speak to digest from last week, and with US payrolls scheduled for Friday, expect more volatility ahead. Meanwhile, oil remains the wildcard and could be the deciding factor in whether we’re looking at lower or higher rates by the end of this week Michiel Tukker We expect volatility to continue in rates markets, with oil prices potentially being the deciding factor on whether we have lower or higher rates this week Bearish rates bias but oil will be the judge Euro rates seem happy to drift higher as growth surprises have turned significantly more positive of late. Last week's inflation reading was also slightly on the bearish side, with core CPI unexpectedly ticking up.
While we think inflation risks are less than feared, in the near term we would not push against markets’ hawkish ECB positioning. Structurally, we still think 2Y euro swap rates should find themselves lower, but this might be more of a 2027 story. As we get more inflation data, limited second-round effects should allow for a more dovish ECB outlook.
For US rates, we continue to see potential for a steepening from both sides in the near term. After last week’s FOMC meeting, markets have turned more dovish on the Fed, but the long end is clearly vulnerable to higher rates. The expectations for Friday’s payroll numbers are just 88k, but still in positive territory.
In a scenario of easing inflation and a relatively steady jobs market, longer rates can stay anchored at higher levels even if the front end comes down. Only when the economic outlook starts deteriorating should we start seeing a more noticeable bullish move in US rates. With the US consumer increasingly struggling, we expect growth headwinds to start mounting in 2027.
Therefore, structurally, we still eye lower US rates across the curve. Meanwhile, the correlation between oil and rates remains strong, and even though the latest signs have turned more positive, we'll have to see concrete steps to open the Strait to prevent oil prices from rising again. The relationship does not show any signs of easing.
If anything, the longer oil prices remain elevated, the higher the risk of second-round inflation effects. Based on a simple linear model, a $10 rise in Brent oil translates to around a 10bp higher 2Y EUR swap rate, 15bp for the 2Y GBP swap rate and 6bp for 2Y USD swap rates. Monday's events and market views The data highlight will be the US ISM manufacturing from July.
Consensus sees an improvement of the headline number from 53.3 to 54.0. Earlier from Europe, we also have Italian and French manufacturing PMIs. So far, the manufacturing indicators have shown resilience amid higher energy prices, and consensus expects another tick higher.
No notable supply is scheduled. Rates Daily Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Michiel Tukker Senior UK & Eurozone Rates Strategist Michiel Tukker is a Senior UK & Eurozone Rates Strategist based in London. Before ING, he worked as a quantitative economist for the Dutch central bank, at BlackRock in its Financial Markets… In this article Bearish rates bias but oil will be the judge Monday's events and market views
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