Treasuries are mostly underperforming Europe where rates have also climbed on the ECB’s hike and as President Lagarde stressed the Bank is not pausing. US equity futures are in the red with the US30, US500 and US100 close to yesterday’s lows. Shares of PacWest Bancorp are trading down -$2.67 or -41.59%. The USDIndex has risen to 101.37 thanks to the data, from 100.74, having slumped yesterday on the FOMC. EURUSD is holding above the 1.10 mark and overall the reaction has been pretty mixed so far.
ECB slows the pace with 25 bp hike. The as expected decision brings the main refinancing rate to 3.75%, and the deposit rate to 3.25%. The initial statement stressed that inflation remains too high, with underlying price pressures still strong. It stressed though that “the past rate increases are being transmitted forcefully to euro area financing and monetary conditions”. A somewhat stronger reference to the impact of past rate hikes. Further decisions will remain data dependent and “based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission”. There was no clear hint that more hikes are in the pipeline, but the ECB also announced that the reinvestments under the APP program will be phased out as of July 2023, which will speed up the reduction of its asset portfolio accumulated under the APP program.
ECB is “not pausing” and has more ground to cover. As in the last meeting, the ECB kept the introductory statement pretty neutral, but President Lagarde used the Q&A to make it clear that the ECB didn’t signal a “pause” today and that more rate hikes are in the pipeline. She suggested that there was a broad agreement that rates needed to go up today, even as there was a variety of views. Eurozone spreads are widening in wake of the comments. ECB still sees “significant upside risks” to inflation as Lagarde flags rising wages and profit margins in some sectors. She added that inflation expectations remain mostly anchored around 2%, but also added that some indicators have gone up and continue to warrant monitoring. The ECB highlighted both downside risks as well as upside risks to the growth outlook, while adding that there are still significant upside risks to inflation. There are also some downside risks, but the upside risks seem to dominate and while the ECB is sticking with a data-dependent approach, the comments back expectations that in the central scenario more hikes are underway.
Lagarde confirmed some called for 50 bp hike at today’s meeting. The ECB also indicated though that there was no-one calling for rates to remain on hold today. Lagarde did keep the ECB on course for additional rate hikes, but was vague on the terminal rate or how far we are away from that, flagging again the data-dependency of decisions and the need to watch the impact of previous hikes that are starting to feed through to the economy. She stressed that we are not seeing a full cycle of policy transmission yet and suggested that the ECB will know when rates are sufficiently restrictive when it has reached that level. That indicates that the ECB does not have a specific terminal rate in mind at the moment. Asked about the decision to phase out the reinvestment of APP assets from July, Lagarde said that the move is not part of any deal on interest rates, as there was a general view that this was the appropriate step at the moment, even though some may have preferred to postpone the announcement until the June meeting.
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Andria Pichidi
Market Analyst
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