NN IP: Week of the central banks - what instruments will be used in the different areas?

NN IP: Week of the central banks - what instruments will be used in the different areas?

15 december 2021

Centrale bank Monetair beleid
ECB Europees Centrale Bank.jpg

For the first time in a while, we do not have a strong conviction view on what the ECB will deliver and what the market implications could be. It is clear that the ECB will end the PEPP in March, and will maintain the APP. On average over the past few months the total monthly purchases of these two programs combined have been around EUR 60bln. And going from EUR 60bln to only EUR 20bln currently in the APP, is a big decline which could trigger significant widening in peripheral spreads. Some ECB speakers have already mentioned that there should be a smooth transition. This could be done via increasing the APP or using an envelope with a fixed amount which could be deployed flexibly depending on market circumstances over 2022.

On the one hand, this will complicate forward guidance, but will allow for enough flexibility and optionality to increase or extend asset purchases. On the other hand, virus developments in Europe could also be a trigger for the ECB to delay the decision until next year, as it will then have more clarity on the impact on the economy for example. This is not our base case. Overall, we expect that an average of EUR 40bln/month in asset purchases or higher for 2022 to be a dovish signal, which should be positive for peripheral spreads. However, we think it is too risky to trade on this expectation as the ECB has been very weak in preparing the market for what could be coming.  We therefore have been scaling down our exposure in our multi-asset portfolios in the past days and last week and we took profit on our 2s10s France flattener position.

We expect the Fed to remain on its hawkish course. Especially since Mr. Powell’s recent Senate testimony where he hinted on speeding up the tapering of asset purchases. In the meantime, labor and inflation data have been mixed, but on balance still very much supportive for a hawkish FED this Thursday. We expect a speeding up of the tapering of asset purchases, which could pull forward rate hike expectations further.

Fouad Mehadi, Senior Investment Strategist Multi-Asset at NN IP:

“Despite this, we foresee that the market will continue to price in a swift but shallow rate hike cycle, which could put further flattening pressure on the yield curve. In fact, we are now starting to see worrying signs emerging as we take a closer look at the yield curve moves of the past few months. The market seems to be pricing in a shallow but quick rate hike cycle as Eurodollar futures and forward rates are already pricing in rate cuts a few years down the line. This is remarkable as we are not in the next rate hike cycle yet. This means that some Eurodollar futures spreads and forward rate differentials are inverting, which historically is always a prelude to further significant flattening of the yield curve. We have already seen this flattening materializing since the June FOMC meeting, but we expect that this is only the start.”

Gerelateerde berichten