STIR
The Euribor-implied rate curve has shifted higher through this month, with last Friday’s stronger-than-expected US labour market report exacerbating recent hawkish moves.
- The largest adjustment since Oct 1 has been in the M5 and U5 contracts (with implied yields 30bps higher in each), a combination of reduced Fed rate cut expectations and an increased front-loading of the ECB’s easing cycle. This is consistent with a faster but ultimately shallower cutting cycle.
- An October ECB cut has been over 90% implied in ECB-dated OIS since start of the month, following the lower-than-expected September flash inflation data and dovish commentary from policymakers (most notably President Lagarde). As such, Z4 implied yields are only 12bps higher this month.
- The Euribor-implied terminal rate for the ECB’s easing cycle is currently 2.050% (up from a closing low of 1.765% on Oct 1), close to the middle of current sell-side estimates of 1.50-2.50% (see here).
- The MNI Policy Team’s sources piece on Sep 30 indicated that 50bp ECB cuts are unlikely, with any acceleration in the pace of easing likely to come from “an increased frequency of 25bp reductions”.
- Therefore, we think there is little scope for sustained repricing at the front of the curve (Z4), but more room from 2025 onwards. Incoming regional (and US) data will be key, alongside any guidance tilts at the October ECB meeting.
- Euribor futures are much less liquid beyond the blues (Z7-U8), but currently indicate a “medium-term” rate of around 2.5%, a little below that implied by the 5y5y interest rate swap.
- Today’s US CPI / jobless claims data has prompted light dovish adjustments in EUR STIRs, but the overall message of the above still stands.
271 words