ECB to be more vocal in September - BNPP

Patrick Jacq, Research Analyst at BNP Paribas suggests that the ECB will be more vocal in September as there was no significant change in ECB rhetoric at its final press conference on 20 July before the summer rest period.

Key Quotes

“The economic situation continues to improve, inflation remains well below the comfort zone, and the risks are balanced. We think the central bank will want to keep things calm after the strong market adjustment that followed ECB President Mario Draghi’s speech at Sintra in late June (when the 10y Bund yield rose more than 30bp). The period of relief that started at the end of last week should therefore continue in the near term. Seasonal factors are supportive (Bund rallied 77% of the time in August since 2004) and upcoming economic data should not fuel hawkish readings; we expect the 10y Bund yield to trade in a 0.50-0.60% range in the next few weeks, ie a small near-term rally.”

“September meeting still critical. The next key meeting is September when the ECB presents new staff projections; we expect it to change the wording of its forward guidance. The central bank will have to prepare markets for changes in monetary policy parameters next year, including its QE exit strategy and rate adjustments. These developments are not priced in and we expect sharp market adjustments by the end of the summer; we therefore think the current relief period is a temporary pause in a structural upward trend for yields.”

“The front end has little scope to rally. The relief seen in bond markets is unlikely to spread through short-term swaps in money markets. While the asset purchase programme continues to support govvies, short-term swaps are being more driven by ECB rate expectations. Given that what is priced in is still relatively dovish, the 2y area of the OIS curve is unlikely to rally much.”