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Needle Still Points South

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Yields Bounce as Equities Make New Monthly Highs

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Bull Rally Accelerates

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Economists Survey Raises 2021 CPI Forecast To 4.9%

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  • In case you missed it, our Policy Team released an interview with National Bank of Belgium Governor Pierre Wunsch yesterday in which he said that PEPP should end in March.
  • He said that "The normal thing would be to fall back on the instruments we had before PEPP, which is the APP, rate policy, TLTRO and others, and recalibrate these instruments to allow for a smooth transition, and for monetary policy to remain supportive. That should be enough."
  • The full interview is available in two parts here and here.
  • Note that the final decision on how PEPP will end and what (if anything) will replace it will be made at the December meeting.
  • Markets are pricing in a first hike from the ECB of around 10bp hike around the end of 2022 at present. This is around a year later than the first 15bp hike expected from the BOE and a few months later than the first hike expected from the Fed.
  • There are some expectations in the market that PEPP gets extended, but the prevailing view seems to be that APP will get adjusted to allow for some of the flexibility of PEPP, and the purchase pace of APP could be increased (albeit at a much lower level than PEPP purchases are currently). Part of this flexibility could be to continue to allow GGBs to be bought.
  • Note that the 10-year BTP-Bund spread has remained broadly in a 100-110bp range since the beginning of June, so the market is either not pricing in much in terms of tapering at present, or is just not too concerned about the impact of tapering.