The European Central Bank is widely expected to raise its deposit rate by 25 basis points to 2.50% on Thursday, with German bond yields sitting near multi-year highs and euro zone inflation running at 3.3% on rising energy costs. Traders are now turning to President Christine Lagarde's press conference and Friday's U.S. inflation report for the next signal on where rates go from here.
The European Central Bank looks set to raise its benchmark deposit facility rate by 25 basis points to 2.50% at its Governing Council meeting in Frankfurt later Thursday, a move markets have fully priced in. The decision marks a swift evolution in market consensus, which had overwhelmingly expected the central bank to hold rates steady as recently as mid-summer.
German yields hold near multi-year peaks
Germany's policy-sensitive two-year Schatz yield hovered near 3.037%, close to its highest level in two years. Further out the curve, the benchmark German 10-year Bund yield held firm at 3.432%, just below the 15-year high it touched earlier in the week. Fixed-income desks are bracing for updated macroeconomic projections and policy guidance from Lagarde alongside the rate call.
Energy costs push inflation higher
Brent crude has been trading above $100 a barrel following expanding military conflict in the Persian Gulf, severely exacerbating cost-push inflation fears across energy-importing European economies. As a result, euro zone inflation picked up to 3.3% in August, propelled by a 14.3% jump in energy components. Institutional allocators expect the ECB's updated staff projections to reflect upward revisions to medium-term HICP inflation, signaling that restrictive policy will need to be maintained well into autumn to prevent second-round wage effects.
Lagarde guidance and U.S. inflation test loom
With the rate hike fully discounted, trading desks are focusing on Lagarde's afternoon press conference for signals on the future policy path. Investors will parse her comments to determine whether the September move is a standalone adjustment to absorb energy price volatility or the opening move of a longer autumn tightening cycle. Beyond Frankfurt, global debt markets are also locking onto Friday's U.S. Consumer Price Index report, where a hot reading following last week's robust U.S. nonfarm payrolls beat would reinforce hawkish pricing across global rate curves ahead of the Federal Reserve's Sept. 15-16 FOMC meeting.
With the rate hike fully discounted by asset markets, Lagarde's afternoon remarks are set to be the deciding factor for how fixed-income and currency desks position into next week's Fed decision.
Source: Investing.com
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