Money market prices within 50-50 chance of ECB 50 basis point hike in July

A symphony of light made up of bars, lines and circles in blue and yellow, the colors of the European Union, illuminates the southern facade of the headquarters of the European Central Bank (ECB) in Frankfurt, Germany, on December 30, 2021 REUTERS/Wolfgang Rattay

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May 20 (Reuters) – Eurozone money markets on Friday raised bets on a 50 basis point interest rate hike from the European Central Bank in July, which would bring the bank’s key rate down to 0 %.

Dutch central bank governor and ECB policymaker Klaas Knot said on Tuesday that the bank should leave the door open for a 50 basis point hike if upcoming data suggested inflation was “widening”. more or was accumulating”.

Knot’s speech changed market expectations, and on Friday traders forecast up to 36 basis points of gains by July. This suggests that a 25bps hike is fully priced in and there is about a 50% chance of an additional 25bps move.

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“Even though (Knot’s) is a minority view at the ECB, I think we can now consider that 25 basis points at this meeting is going to be the minimum,” said Antoine Bouvet, senior rates strategist at ING.

Rising bets on a 50 basis point rise also pushed Germany’s two-year yield up 16 basis points this week, according to Tradeweb prices.

The much larger rise in the two-year yield relative to the 10-year yield has sharply narrowed the yield curve by 11 basis points this week in the biggest move since the peak of the COVID-19 pandemic in March 2020, showed Tradeweb.

On Friday, it was around 60 basis points, just off the most stable level since late February.

While the flattening of the US Treasury yield curve has been a major theme this year with a brief inversion in March, the slope of the German curve has long puzzled analysts given the weaker growth outlook in the eurozone. Read more

Jens Peter Sorensen, chief analyst at Danske Bank, saw the flattening following “growing expectations that the ECB will deliver rate hikes similar to what we have seen in the US”.

If growth fears persist, that should keep longer-term yields going as central banks keep pressure on shorter-term yields, Sorensen said.

Yield curves

Across the market, eurozone bond yields rose after two days of sharp falls that were accompanied by a rout in equity markets as concerns about growth returned to center stage. Yields move inversely to prices.

The yield on Italian 10-year bonds jumped and at 1457 GMT was up 8 basis points to 2.985%. . Meanwhile, the spread between the Italian and German 10-year bond yield spread exceeded 200 basis points for the first time in more than a week.

European stocks rallied on Friday after China’s slashing of a key lending benchmark to support a slowing economy boosted risk sentiment, but lost some gains towards the end of the month. session. Read more

After earlier highs when up 6 basis points, the yield on German 10-year bonds – the benchmark for the euro zone – rose 1 basis point at 1456 GMT, to 0.95%. . It had fallen 12 basis points on Wednesday and Thursday.

Eurozone consumer confidence rose 0.9 points in May from the April figure, figures released on Friday afternoon showed. The European Commission said a flash estimate showed eurozone consumer sentiment improved to -21.1 this month from -22.0 in April. Read more

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Reporting by Yoruk Bahceli; edited by John Stonestreet, Kirsten Donovan and Susan Fenton

Our standards: The Thomson Reuters Trust Principles.

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