Investors tweak bets on ECB rate cuts to the dovish side after Fed, SNB

By Thomson Reuters Mar 21, 2024 | 5:49 AM

By Stefano Rebaudo

(Reuters) – Investors tweaked views about the European Central Bank’s policy path to the dovish side on Thursday, while bond yields dropped after the Federal Reserve indicated 75 basis points of monetary easing in 2024 and the Swiss National Bank cut rates.

Money markets priced in a 90% chance of an ECB rate cut by June from less than an 80% chance late on Wednesday. They discounted more than 90 bps in 2024 from 85 the day before.

Federal Reserve Chair Jerome Powell said on Wednesday that recent high inflation readings had not changed the underlying “story”.

“All in all, the impact of the Fed and the SNB on the euro area is limited,” said Joost van Leenders, senior investment strategist at Van Lanschot Kempen.

Germany’s 10-year government bond yield, the euro area’s benchmark, dropped 4 bps to 2.39%.

“Fed’s expectation for the economic growth in the U.S. questions the possibility of three rate cuts in 2024,” he added. “However I expect the ECB to be able to ease its monetary policy even if the U.S. central bank should hold in June.”

Fed funds futures traders are now pricing in a 66% probability that the Fed will begin cutting rates in June, up from 59% on Tuesday, according to the CME Group’s FedWatch Tool.

“The risk to our Fed call of a June start and 125 bps of cumulative cuts are clearly tilted towards a later start and fewer cuts,” said Xiao Cui, senior economist at Pictet Wealth Management. “If inflation fails to moderate in March, that would significantly reduce the odds of near-term policy easing.”

The SNB is the first major central bank to dial back tighter monetary policy to tackle inflation, while analysts expected a first move in June.

The Swiss 2-year yield, more sensitive to expectations for policy rates, fell 12.5 bps to 0.99% and was on track for its biggest daily fall since December.

“That should allow for additional rate cuts by late 2024,” said Aaron Hurd, senior portfolio manager at State Street Global Advisors, after mentioning global disinflation and a downtrend in Swiss services inflation.

Money markets fully price a cumulative 75 bps of SNB rate cuts by September 2024.

Italy’s 10-year yield fell 6 bps to 3.65%.

The gap between Italian and German 10-year yields – a gauge of the risk premium investors ask to hold assets from the euro area’s most indebted countries – was at 124.5 after hitting 115.4 last week, its lowest in over two years.

Investors closely watched the spreads’ tightening across bond markets as they turned a blind eye to the rising Italian budget deficit and reckoned that a resilient economy would control the country’s critical debt-to-GDP ratio.

Markets now await the outcome of the Bank of England policy meeting at 1200 GMT.

(Reporting by Stefano Rebaudo, Editing by William Maclean)