Rates Spark: Too early for the doves
The desk interprets the current commentary as underscoring a persistent hawkish bias from the ECB, despite softening economic conditions. According to the full note source, oil prices stabilizing near pre-war levels may not lead to a dovish pivot from the ECB, with expectations for at least one more rate hike firmly in place. The commentary reveals that while oil's influence on rates has diminished, upside risks still loom, suggesting a careful approach to monetary policy remains necessary. This aligns with recent indications from ECB officials that a cautious stance is prudent, as they balance the need for stability against inflationary pressures, amidst mixed economic data from the Eurozone. The narrative suggests that while some officials may advocate for a pause, the broad expectation remains that risk management will lead to at least one further rate increase in the near future.
What the desk is arguing
The commentary asserts that the ECB is unlikely to adopt a dovish stance soon, due to ongoing inflation concerns linked to oil prices. Per the full note source, while oil is stabilizing near pre-war levels, this does not equate to a stable fiscal environment. The ECB's cautious approach suggests they anticipate the need for at least one more hike to safeguard against any inflation resurgence.
Supporting this outlook, recent commentary indicates that while oil prices have seen variances, key economic sentiment indicators from the Eurozone reveal diminishing expectations for increases in selling prices, reflecting broader economic weakness. Notably, several ECB officials, like Mārtiņs Kazāks, are recognized for promoting a more measured approach without signaling an imminent change in policy, reinforcing expectations for another hike.
The alternative read that may arise is that a significant downturn in oil prices or a notable shift in economic indicators could prompt a rethink; however, such a pivot feels less probable based on the current analysis.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01ECB maintains a hawkish bias despite softening economic conditions.
- 02Oil price stabilization does not imply a dovish pivot from the ECB.
- 03Expectations hold firm for at least one more rate hike.
- 04Mixed economic data indicates cautious policymaking ahead.
Market implications
Traders should monitor Eurozone economic indicators closely as a signal of rate directionality. Given the commentary's emphasis on inflation linked to oil prices, the EUR/USD pair could face volatility around the 1.075 level while awaiting further cues from central bank commentary.
Risks to this view
If oil prices continue to fall significantly or if economic indicators from the Eurozone show stronger than expected improvement, this could pressure the ECB to reconsider its rate hike trajectory, potentially shifting sentiment sharply towards a more dovish outlook.
Articles Rates Spark: Too early for the doves 07:30 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Oil is back near pre-war levels, but there are reasons to believe the market is too optimistic over the speed and sustainability of the supply recovery. Rates’ oil sensitivity has become more muted, but uncertainty argues against a dovish turn from the ECB, keeping a hawkish bias for now and flooring expectations at “one more hike” Michiel Tukker and Benjamin Schroeder Oil is back near pre-war levels, but upside risks linger. Enough reason for the ECB to keep a hawkish bias and floor hike expectations at "one more" for now Oil is stabilising around pre-war levels, but we continue to see upside risks in the near term that could pose some upward pressure on rates.
The recent fall in oil prices can partly be attributed to the current imbalance between supply and demand. Physical buyers are still awaiting better pricing while countries’ strategic reserves continue to add supply to the market. This is not a stable equilibrium, however.
At some point, buyers will need to enter the market, and reserves will have to be replenished. At the same time, we have to acknowledge that the sensitivity of rates to oil will likely be more muted going forward. The tail risks of oil jumping above $100 have diminished significantly, mitigating second-round inflation risks.
Also, recent economic sentiment indicators from the eurozone suggested that expectations for selling prices already fell fast in June . However, we don’t expect a strong dovish turn from central banks either. Some ECB officials, such as Mārtiņš Kazāks, may voice more openly that there is now more room for a wait-and-see stance, effectively diminishing the odds of a hike in July.
But we don't think that the narrative of at least one more hike will be abandoned, if only to keep it for risk management purposes. ECB President Christine Lagarde, opening the Sintra central banking forum, suggested as much by noting the durability of the deal in the Middle East was "far from assured." As she also pointed out, ECB policy already begins to take effect ahead of any decision, which “buys us time to assess how a shock is developing before we commit to a course of action.” Seen through this lens and amid still-high uncertainty, keeping a somewhat hawkish bias makes sense. Only later this year will we have a better understanding of the second-round inflation impact and more certainty about the trajectory of oil.
Tuesday’s events and market view The calendar is turning busier. In the Eurozone and in the lead-up to Wednesday’s flash CPI for the bloc, markets will watch French, German and Italian preliminary June CPIs after Spain’s release on Monday. Key will be the lineup of ECB speakers, which may help clarify the central bank's reaction function as geopolitics seemingly exerts less influence on energy markets.
Among others, we will hear again from Isabel Schnabel and from Chief Economist Philip Lane. The US will release the JOLTS job opening numbers for May, and we will also get the Conference Board’s measure of consumer confidence for June, where markets are looking for a slight improvement. No government bond supply today.
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 Authors 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… Benjamin Schroeder Senior Rates Strategist Benjamin Schroeder is a senior rates strategist at ING in Amsterdam. Before joining ING in 2016, he worked in fixed income research at Dresdner Kleinwort and Commerzbank in Frankfurt, Germany.… In this article Tuesday’s events and market view
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