STIR: Nordea Wary Of Dovish ECB Pricing Risk
Nordea note that “less than one full ECB rate cut is priced in after markets took a hawkish read of the June ECB meeting. Rate cuts from Norges Bank and the SNB today could prompt renewed interest to add rate cut risks to ECB pricing”.
- As a baseline, Nordea think that the ECB is done cutting.
- However, they are of the opinion that “risks are skewed squarely towards rate cuts this year, and the ECB will most likely want to act faster to new shocks relative to the too slow initiation of the 2022 hiking cycle. The door is wide open to act as necessary and fast at thatQ.
- They identify July as a potential target for receivers, noting that “there is a significant risk that markets will price in a higher likelihood of a rate cut as we approach the 9 July tariff deadline. A lot can still happen” (between now and then).
- Further out, for the December meeting, they note that “with all the risks ahead, most of which are skewed to the downside, we struggle to see markets price out that last rate cut completely, while it is somewhat easier to see more cuts being priced back in”.
- Ultimately, Nordea are of the view that “2y1y remains the best point to receive on the curve”.
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GERMANY: Fin Min Advocates Gov'ts Centrist Stance Ahead Of SPD Re-Election Bid
Reuters reporting comments from Finance Minister Lars Klingbeil, who has been speaking on a number of topics. On the aims of the 'grand coalition' gov't, Klingbeil says, "We have a historical responsibility as a coalition to improve economic conditions...We need to invest in the future, but also consolidate our finances for the future." Klingbeil claims the "coalition has shown that it can reach agreements...I am sure this gov't will build bridges at the centre [of the political spectrum]."
- On US-EU relations, Klingbeil adds, "US tariffs are threatening German jobs [and] EU negotiations must continue [in order] to find a solution." Says that, at present, "I do not see the need for common EU borrowing at the moment."
- Klingbeil, the Finance Minister and Vice Chancellor, is running for re-election as co-chair of the centre-left Social Democrats (SPD), the junior partner in the gov't. The party's federal congress takes place from 27-29 June. Labour Minister Bärbel Bas has indicated her intention to run to replace outgoing co-chair Saskia Esken.
- Hailing from the party's right, Klingbeil, who spearheaded the SPD negotiating team during talks with Chancellor Friedrich Merz's conservative Christian Democratic Union, ensured the appointment of several leftist figures from within the party to ministerial posts in order to solidify his leadership position.
- Klingbeil has talked recently that the SPD has lost its historical position as the party of organised labour and the working classes, and has called for a 'sharpening' of its image.
OUTLOOK: Price Signal Summary - Bear Threat In Gilts Still Present
- In the FI space, Bund futures continue to trade above last week’s low print. The move higher undermines the recent bearish theme and suggests the move down between Apr 22 - May 15, has been a correction. An extension higher would strengthen the reversal and open 130.86 next, the May 9 high. Further out, scope would be seen for an extension towards 132.03, the Apr 7 high. Key short-term support has been defined at 129.13, the May 15 low.
- A bear cycle in Gilt futures remains in play and the recent impulsive sell-off strengthens a bearish theme. The move down exposed 90.92, 76.4% of the Apr 9 - May 2 rally. This level has been pierced, a clear break of it would pave the way for an extension towards 90.47, the Apr 11 low. Resistance to watch is 92.30, the 20-day EMA. Clearance of this level would be bullish and signal a potential reversal.
ECB: ECB Speak Wrap (Apr 17 – May 20)
For the full publication, which contains a comprehensive summary of ECBspeak since the April decison, see here: 250520 - ECB Speak Wrap.pdf
The balance of ECBspeak since the April decision clearly leans in favour of another 25bp cut on June 5, with the bank’s reaction function still dominated by downside growth risks even after the partial rollback of US/China tariffs. Progress on an EU-US trade deal remains limited, and the April acceleration in services inflation is expected to be temporary. That leaves markets pricing a terminal rate of ~1.70% by early 2026, slightly below the lower bound of the ECB’s heavily caveated neutral rate range.
- Overall, the broad strokes of the MNI Policy Team’s sources piece on April 29 remain prescient: While there is broad consensus among European Central Bank policymakers that U.S. tariffs will exert downward pressure on inflation for the short term at least, hawks warn that June’s meeting will see lively debate despite a general expectation that it will result in a cut.
