Citi: Market Underprices Chance Of ECB Hike Next Week

Citi believe “the market is underpricing the chance that the ECB hikes next week and pricing seems inconsistent with survey expectations.”

• “A hike likely (just) edges it to boost credibility in the ECB’s new policy approach and perhaps to help fight the rally in front-end real OIS.”
• “That makes the risk/reward bearish into the ECB which we think could set up a buying opportunity for Bunds.”
• “Bunds remain stuck in a grinding bearish channel. While we still think an eventual break out is more likely bullish rather than an acceleration of the bearish trend.”
• “One last hike could briefly push 10yr yields close to YTD yield highs, but this would be a buying opportunity for Bunds in our view.”
• “We expect the market to largely dismiss the prospect of further hikes and rate cut pricing for 2024 is unlikely to recede much further given higher-for-longer lacks credibility amidst an uncertain outlook and is inconsistent with a data-dependent, meeting-by-meeting approach.”
• “PEPP QT is likely surging up the agenda putting EMU spreads on alert for widening risk, but, relatedly, we no longer believe QT will necessarily tighten swap spreads.”