Euro Zone inflation at record highs!

This is a big issue for the ECB, and they're very much between a rock and a hard place.

For years the bank has kept policy extremely easy, and the economy has largely become used to this.

However, they are now facing an inflation backdrop that ironically, they probably could only dream of 10 years ago (OK maybe not as high as it currently is, but you get the point).

So what do they do from here?

Just now, ECB's Philip Lane said, 'today's inflation number is very high.'

Clearly then, there is a hawkish pivot occurring in the ECB.

And we can see that the market has been pricing *some* hawkishness since the start of the year, if we look at EURIBOR futures...

FEU31!


And the current market implied data suggests that the ECB are set to embark on a hiking cycle.

In picture 1, we can see the Euro Area 1wk refi rate, which suggests that by September, at least a 25bp hike is priced in...

Well, that is simply way too late, so think the odds will have been frontloaded way more now.

In chart 2, we can see the overall policy path, which suggests that the ECB will reach a rate of 1.00% by 2024.

And in chart 3, we can see how likely behind the curve the ECB is, especially with today's inflation prints...

There's likely a trade in here then.

If the market is expecting rate hikes further out, but they actually happen sooner, it's likely that European risk assets will be hit, specifically credit and their corresponding spreads.

This would have a knock on effect to equities.

Higher refinancing rates mean tighter margins.

So pay attention to the ECB going forward, since they have the greatest relative policy pivot from historical out of all
central banks!