What to watch

The European morning session will see market continue to find their new levels after yesterday's FOMC Minutes while German state CPI and Eurozone PPI data will also be closely watched.

• Yesterday's FOMC Minutes were more hawkish than expected in two respects. First, the dot plot was reinforced by the statement that participants noted that "it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated." This saw the short end come under pressure, with a March hike now around 75% priced by markets (up from around 65% prior to the Minutes release). Three hikes by the end of 2022 is now almost fully priced with around an extra 1/3 of a hike fully priced post-Minutes. Second, the language on the balance sheet was firmed up, and a faster pace of QE unwind is now being priced by the longer-end (for more on the balance sheet see this comment from our team yesterday).
• Bunds are off their lows in early European morning trading after following Treasuries lower overnight.
• German state CPI data will be closely watched through the day today and provide a driver for the Euribor strip and EGBs. Note that Tuesday's French HICP was a little lower than expected while Italian HICP data yesterday was largely in line with expectations. The pan-Eurozone HICP print will be released tomorrow while we also receive Eurozone PPI today.