ECB to hike rates again
Bond yields rose quite sharply on the back of rising oil prices, while higher yields weighed on equity markets which ended a good bit lower on the day. In FX, the euro held in well notwithstanding the continuing rise in oil prices. It is trading at around $1.1640 and £0.8585 against the dollar and sterling respectively this morning, ahead of the ECB’s interest rate announcement early this afternoon, while the pound is little changed against the dollar at about $1.3560. The ECB is almost certain to raise interest rates for a second time since June, hiking the deposit rate by another 25bps to 2.5%. It may also nudge up its inflation forecasts, perhaps its growth projections too, but while it may (as usual) remain non-committal about future decisions, market expectations for further rate increases ahead are likely to remain largely intact, particularly given elevated energy prices.
The sell-off in government bond markets continued as Brent oil prices climbed above $100 a barrel. German yields rose by around 6-7bps (with French and Italian yields posting increases of circa 10-11bps), while UK yields were 8-10bps higher on the day. The start of the Treasury’s enlarged bond buybacks helped to limit but not prevent a rise in US yields, which rose by 4-5bps across the curve. There’s some very modest relief for bonds this morning as yields nudge down in tandem with an easing in oil prices.
Higher bond yields weighed on equity markets. European stocks underperformed, with the Stoxx Europe 600 closing around 1.5% lower on the day, while the main US indices shed between 0.5% and 0.8%. Like for bonds, there is some modest relief for stocks at the start of play today with European indices opening in positive territory.
Looking to the day ahead, the focus will be on the ECB rate decision with the market fully priced for a quarter-point hike in the deposit rate. On the economic data front, the main releases are in the US with producer prices (PPI) for August and the regular weekly jobless claims report due.