Money markets price in 50-50 chance of 50 bps July ECB hike

div classBodysc17zpet90 cdBBJodivpBy Yoruk Bahcelip

pReuters – Euro zone money markets on Friday ramped up their bets on a 50 basispoint interest rate hike from the European Central Bank in July that would bring the banks policy rate to 0. pdivdivdiv classBodysc17zpet90 cdBBJodiv

pDutch central bank governor and ECB policymaker Klaas Knot said on Tuesday that the bank should keep the door open to a 50 bps hike if upcoming data suggested inflation was “broadening further or accumulating”.p

pKnots speech shifted market expectations, and on Friday traders priced in as much as 38 bps of hikes by July. That suggested a 25 bps hike is fully priced in, and a 52 probability of an additional 25 bps move.p

p“Even if Knots is a minority view at the ECB, I think we can now consider that 25 basis points at this meeting is going to be the minimum,” said Antoine Bouvet, senior rates strategist at ING.p

pBy 1055 GMT, bets had eased slightly but money markets still priced in a 48 chance of such a move. p

pRising bets on a 50 bps hike have also driven a 16 bps surge in Germanys twoyear yield this week, according to Tradeweb prices.p

pThe much greater rise in the twoyear yield relative to the 10year sharply narrowed the yield curve by 11 bps this week in the biggest move since the height of the COVID19 pandemic in March 2020, Tradeweb showed.p

pOn Friday, it was around 60 bps, just off the flattest since late February. p

pWhile U.S. Tresaury yield curve flattening has been a big theme this year with a brief inversion in March, the steepness of the German curve had long puzzled analysts given a weaker growth outlook in the euro area. p

pJens Peter Sorensen, chief analyst at Danske Bank, saw the flattening as a result of “the rising expectations that the ECB will frontload rate hikes similar to what we have seen in the U.S.”p

pIf growth fears continue, that should hold down longerdated yields while central banks will keep pressure on shorterdated ones, Sorensen said.p

pGraphic: Yield curves, https:fingfx.thomsonreuters.comgfxmktgdpzyedyyvwyield20curves20may2020.png p

pAcross the broader market, euro zone bond yields rose after two days of hefty falls that came with a rout in stock markets as growth concerns moved back into focus. Yields move inversely to prices. p

pEuropean stocks rallied on Friday, however, after Chinas cut in a key lending benchmark to support a slowing economy boosted risk sentiment.p

pGermanys 10year bond yield – the benchmark for the euro zone – was up 6 bps to 1.00 and set to end the week 5 bps higher.. It had fallen 12 bps across Wednesday and Thursday.p

p“The important development here is that bonds and stocks are positively correlated again. This is far from a given in a phase of inflation, in a phase of repricing of monetary policy,” Bouvet said.p

p“… So a lot of the adjustment in monetary policy expectations has been had already, so were back to normal markets, riskon, riskoff.”p

pInvestors will watch for speeches from several ECB policymakers including chief economist Philip Lane as well as euro zone consumer confidence data later on Friday. p

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pp Reporting by Yoruk Bahceli editing by John Stonestreet, Kirsten Donovanp

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