###POV. ECB AND THE 10Y SWAP RATE. - To....>

ECB VIEW: ###POV. ECB AND THE 10Y SWAP RATE.

- To quickly summarise the consensus on this ECB meeting. Small tweaks to Staff

forecasts (slightly higher), restate key aspects of its forward language,

including standing "ready to increase the APP in terms of size and/or duration",

although some see this going. Finally, most see a dovish press conference. 

- For the EUR 10Y rate, if the consensus holds, the rate should drop a little.

However, the DNA of the EUR 10Y rate comes from the Euribor strip. Specifically

changes can be accurately mapped using the formula 0.84 * 5th fwd Euribor and

1.33 * 5th-9th fwd spread. So, changes in rate expectations one year hence and

changes in the pace of rate hikes between one and two years out (Jun-19 to

Jun-20); indeed the second part is far more important for determining mkt

reaction (euribor 5th-9th spread is 46bp today). Dec-17 Staff forecasts saw HICP

rising from 1.5% (Q2-19) to 1.7% (Q2 19). Not quite in the danger zone. It would

likely need these numbers bumped up by 20bp for the market to think in terms of

3 hikes. For a sense of scale, a 25bp of additional hike (times 1.33) adds 33bp

to a EUR 10Y swap rate or perhaps a little more if Jun-19 rate forecasts rise.