• There was no ECB decision/press conference scheduled for today. However, in a blog on the ECB website, President Lagarde flagged a path for ECB normalization
that is more specific than the info often provided at a regular policy meeting. Lagarde didn’t need the ‘approval’ of new staff forecasts to conclude that monetary policy entered a different environment than before the pandemic with an almost permanent undershoot of the inflation target. Three shocks have changed the landscape.
OPEC not meeting its production targets and the consequences of the war in Ukraine sharply raised energy and food prices. Supply and demand shocks during the pandemic led to record high goods inflation. The reopening of the economy now causes a rotation back to the services sector with new bottlenecks, raising inflation. The ECB concludes that the disinflationary dynamics are unlikely to return, even as the economy is not facing a straightforward situation of excess aggregate demand. If inflation stabilizes over the medium term, progressive normalization of interest rates to the neutral rate is appropriate.
Lagarde didn’t specify the neutral rate, but we assume it to be near 1.5%. Given the uncertain context, normalization will still be guided by gradualism, optionality and flexibility.
For near future, Lagarde rubberstamped the scenario of APP to be finished very early in Q3 with an interest rate lift-off in July and an exit from negative interest rates by the (end of) the third quarter. The reiteration of the principle of gradualism probably wants to ease speculation on a 50 bps lift-off, at least for now. With respect to flexibility, the blog also says that the ECB, if needed, might deploy new tools to prevent that normalization would lead to a fragmentation in monetary policy.
The immediate reaction of EMU interest rates to the blog was modest. German yields are rising between 4-3 bps (2-5/10-y sector) and 5 bps (5 y). July and September rate hikes were already largely discounted. Even so, this concrete guidance puts a solid floor for ST rates.
Next week’s EMU May inflation is next important reference e.g. to potentially reopen the debate on the need of a 50 bps hike (if it would be materially higher than expected). Uncertainty on growth, as said, is an important reason for the ECB to advocate gradualism. In this respect, German IFO business climate unexpectedly improved from 91.9 to 93.0.
Companies especially were more satisfied with current business (99.5 from 97.3). Expectations hardly improved (86.9). A broader reality check will be provided by the PMI’s tomorrow. In a risk-on context, the US curve bear steepens with the 2-y rising 2.5 bps and the 10/30 y sector gaining 3.5 bps. Both US and EMU equities on average are gaining about 0.75% to 1%+ (US).
• Of late the dollar gradually eased off peak levels reached earlier this month. This trend continues. The DXY index currently tests first support at 102.33. USD/JPY stabilizes near 127.80. Next to some USD softness, the ECB guidance finally propelled EUR/USD (currently 1.0655) above the 1.0642 resistance (May 5 top). If confirmed, it would indicate pressure on the single currency is easing. EUR/GBP rallied from the 0.84/35 area to currently trade near 0.8470. Also worth mentioning, EUR/CHF (1.0285) didn’t join the broader euro rebound as SNB’s Maechler said the SNB won’t hesitate to hike rates if necessary.
• Belgium successfully raised the high end of the range on offer (€3.8bn) at today’s regular OLO auction. It tapped OLO’s 74 (€1.26bn 0.8% Jun2025), 94 (€1.76bn 0.35% Jun2023) and 80 (€0.8bn 2.15% Jun2066). Bid-to-cover averaged 1.73, in line with last month’s 1.71. The Kingdom is now halfway through this year’s €41.2bn OLO funding needs. In other Belgian news, business confidence dipped slightly more than expected, from 2.4 to 1.8. Loss of confidence was the most apparent in trade, where demand expectations dropped sharply. In the building industry, all the underlying components contributed to the decline in confidence, from demand forecasts and the current level of order books to the trend in orders over changes in use of equipment. Trade and building industry was only partially compensated by a marginal confidence increase in the manufacturing and business-related services industry, both on the account of improved demand (expectations).