ECB: A Content Lagarde Heavily Hints At A Pause

FOR THE FULL PUBLICATION PLEASE USE THE FOLLOWING LINK

EXECUTIVE SUMMARY: 

• Norges Bank is widely expected to keep policy rates on hold at 4.50% on May 8. Rates have been at this level since December 2023, after the Board opted to go against prior guidance for a cut in March due to an acceleration in inflationary pressures at the start of this year.
• The May meeting is an interim decision, so does not include an updated MPR or rate path projection. Norges Bank generally avoid sending fresh monetary policy signals at these decisions, so the base case is that current guidance stating “the policy rate will most likely be reduced in the course of 2025” will remain in the policy statement. We do not think there is enough evidence to support a dovish Norges Bank guidance tilt yet. CPI-ATE inflation remains above 3% and there are not yet signs of deteriorating labour market conditions. These dynamics should offset the dovish developments since the March 27 decision, namely higher economic uncertainty, weaker oil prices and increased foreign rate cut expectations.
• Analysts are unanimous in projecting rates to be held at 4.50% in May, with limited expectations for any guidance changes in the policy statement. Most analysts expect 2x25bp cuts in 2025, with September the most likely start date. 

• 8,250 0QZ5 96.25/96.37 put spds ref 96.85 to -.855
• prior +2,500 SFRZ5 call spds, 4.0 ref 96.46

Our commodities team notes that crude front month futures and prompt time spreads rally back to levels seen late last week on risks of rising Middle East tension amid reports of Israeli military strike on Yemen's main airport in the capital.

• The IDF claimed the attack on May 6 destroyed Houthi infrastructure including a strike on the Sanaa International Airport and targets in the Hudaydah Port, BBC said.
• Crude prices were already recovering ground following a decline at the start of the week as the markets weighed the latest OPEC+ decision to raise output in June.