Minutes of the March ECB meeting kickstarted the countdown to next week’s ECB meeting. In line with FOMC Minutes, they surprised markets in a hawkish manner. The key takeaway was some ECB members already argued in favour of a firm end date (in Summer) for asset purchases. Eventually the ECB decided to accelerate the tapering of its asset purchases to €40bn in April, €30bn in May and €20bn in June. Ceteris paribus, they will end in Q3.
We believe that the hawkish elements in the March minutes will turn into reality at next week’s meeting given that the March inflation numbers (7.5% Y/Y) already pale the March ECB staff projections. By labelling June the firm end date for asset purchases, the ECB creates a window of opportunity to stat hiking policy rates faster than expected. Copying the Fed’s playbook suggests a potential first rate hike in the month when net asset purchases end (ie June). However, the ECB’s updated forward guidance (first hike some time after net asset purchases end) suggests that the earliest lift-off date is probably July.
European bonds underperformed US Treasuries following the Minutes in a bear flattening move. German yields closed 2.1 bps (30-yr) to 3.7 bps (3-yr) higher. Intraday yield rises had been bigger. Yields started retreating around the start of the US trading session as oil prices slipped away. Brent crude dipped below $100/b for the first time since mid-March after the International Energy Agency announced that they would bump global supply by 240 million barrels.
The US yield curve continued its pre- and post-FOMC Minutes steepening trend on the Fed’s stealth quantitative tightening plans. Daily changes on the US yield curve ranged between -1.1 bp (2-yr) and +5.9 bps (10-yr). We retain comments from St. Louis Fed Bullard who argued in favour of lifting the policy rate to 3-3.25% by the end of this year. US weekly jobless claims dropped to 166k, their lowest level since 1968.
The euro attempted to regain the 1.09 big figure in the wake of ECB Minutes, but the single currency couldn’t hold on to this gain. Return action eventually pulled the pair lower to close at 1.0879. The trade-weighted dollar extended its gains and has the 100 big figure in sight.
Today’s eco calendar is completely empty in the US and EMU. It gives way for risk sentiment to direct intraday gyrations. In general, we expect ruling market trends to continue: core bonds and stock markets are in dire straits just like the euro unless the ECB provides some additional verbal backing at next week’s policy meeting.
Canada presented a much more conservative 2022 budget than expected. The net costs of 2022 budget measures (new spending minus new revenue from taxes) will be over C$31bn whereas some were anticipating a number closer to C$100bn. Finance minister Freeland chose not to deliver on some election promises to keep spending in check while banking on additional levies on financial institutions, the elimination of loopholes and tax avoidance strategies and a review of overall existing spending. The new plan sees Canada’s finances nearly in balance within five years with cumulative deficits through 2027 estimated C$50bn lower compared to the December update. The budget gap for this fiscal year is projected at C$52.8bn vs almost C$60bn in December. Total bond issuance for this year is seen at C$212bn, down from C$255 in the previous fiscal year.
France is headed for the first round of the presidential election on Sunday. A recent Ipsos poll (Apr 5 -7) showed Macron’s lead over far-right candidate Le Pen narrowed to just 3.5 ppts, continuing a trend that has been visible for some weeks now. According to the Ipsos poll, Macron would have 26.5% (-0.5 ppts) of the votes on Sunday while Le Pen would score 23% (+1 ppt). Far-left candidate Melenchon may come in third with 16.5%. Some analysts have attributed the rise of Le Pen in the polls to the recent euro weakness – even though abandoning the euro is no longer in Le Pen’s programme – and OAT underperformance.
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