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...
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!
Great analysis, I find it hard to comprehend that the ECB and the Fed are 'suprised' by the current inflation levels... I mean these people understand the financial markets right? They understand what their programmes have caused? And were they even necessary in light of much bigger problems (than covid) that we have now? Simply said, they overreacted to a relative small problem causing a much bigger problem and now they don't have room to react without causing a recession. Maybe govs should rethink what their covid policies (not the virus) have caused...
FinkPro
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@cryptobullethbtcxlm, Completely agree - wouldn't say it's all down to the increase in money supply (I think massive dislocations are a bigger factor in play) but they play a part yes.
cryptobullethbtcxlm
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@Macrodesiac, agree but they disrupted supply chains themselves with lockdown (even worse: zero covid) policies. You can't drop everything because there's a virus. Only when you are 100% sure, it kills pretty much everyone it is understandable, but they did not know much. They acted out of fear and not out of reason. Reason is what we miss these days in the world, also in the markets.
Johanvalkema
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In Th Netherlands we are overall at 12,5 % inflation
rumdiaries
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Perhaps if they stopped trying to inject everyone this wouldnt have dragged on as long as it has. Alot of us know why COVID happened and it was FA to do with a virus and everything to do with trying to control everyone on a macro level. Rates will go up significantly and the fake war in the Ukraine will continue but only because they know the vast majority arent falling for the former BS