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### POV: Will the ECB lose its nerve? The...>

EURIBOR: ### POV: Will the ECB lose its nerve? The short end of the Euribor
futures strip has remained anchored throughout the Italy crisis while the longer
end has rallied significantly. This can be interpreted as the market seeing ECB
holding its nerve on tightening policy in 2019, but would soon reach its limits.
- Rate hike expectations are increasingly dovish. MNI PINCH is pricing out any
chance of an ECB rate hike in the next 12 months, and since Friday odds of a
10bps hike in Jun-19 has fallen to 32% from 46%, and 59.5% from 91% for Sep-19.
- The spread between Dec20 vs Dec18 Euribor implied rates has fallen from 0.925%
in Feb to 0.42%, erasing all of the steepening since April 2017 and suggesting
that a sustained ECB tightening cycle is falling off the agenda.
- If Italian debt blows out further, ECB policy options may be limited to broad
easing. Italy could avail itself of the OMT programme, but this requires having
a government in place that will assure compliance with an ECB programme - a
prospect which seems remote given the current political situation.
- Periphery contagion would bolster the ECB wait-and-see case, but Spanish 10Y
spreads still lower than early 2017, despite rising 61bps vs Bunds in a week.

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