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Fixed income markets remain under pressure following the intervention of the Bank of England

La Banque centrale européenne a réaffirmé que son objectif principal était le respect de son mandat, c'est-à-dire le retour de l'inflation vers son objectif de 2 %.

Posted Sep 30, 2022 7:25 AMUpdated on Sep 30, 2022 at 8:03 am

After their heat stroke the day before linked to the upheavals of the British Gilts market, European government bond rates caught their breath a little on Thursday. They stabilized, but still around levels not seen in ten years and at the end of a session still marked by high volatility. The yield on 10-year German government bonds was 2.18%, compared to 2.11% the previous day. Its French equivalent, which evolved between 2.78% and 2.90% all day, ended at 2.81%.

As for equities, European stock markets, which had regained some strength on Wednesday, plunged again, weighed down by the prospect of further tightening of monetary policies. In Paris, the CAC 40 lost 1.53% to settle at 5,676.87 points, its lowest level of the year. In session, it even fell by more than 2%. London lost 1.77%, Frankfurt 1.71% and Milan 2.40%. At the end of the afternoon, the S&P 500 yielded 2.14% and the Dow Jones 1.54%.

No respite

Those who had believed to see in the emergency measures adopted Wednesday by the Bank of England a beginning of lull in the fight against inflation were for their expenses. Central banks are indeed more than ever determined to counter a surge in prices that leaves them no respite.

In Europe, even if Spanish inflation, which rose from 10% over 12 months between June and August to 9% in September, gives hope of a peak, the data from Germany show on the contrary that the there is still a long way to go. Consumer prices jumped 10.9% in September, well above the 10.2% consensus expectation. Consequence: the figure for the euro zone, which will be published this Friday, could according to Barclays approach 10%.

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75 basis points

This entry of Germany into the club of countries with double-digit inflation – a first since the creation of the euro – further reinforced the idea of ​​a major tightening at its next meeting on October 27. . The key ECB rates should be raised again by 75 basis points. The deposit rate would then rise to 1.50%.

The hypothesis is favored by the governors of the Baltic central banks, who are faced with local inflation that exceeds 20%. But even the Finnish, Olli Rehn, yet ranked among the moderates within the Board of Governors, did not rule out an increase of this magnitude. His Austrian counterpart, Robert Holzmann, considered the most hawkish (supporters of a hard monetary policy) of all the members of the ECB, for his part pretended to consider a 100 basis point increase. While immediately considering that it would probably be too much.

Without giving figures, the president of the monetary institute, Christine Lagarde, has also shown an unfailing will. At a conference in Frankfurt on Wednesday, she confirmed that the ECB would put the fight against inflation before growth. “If we did not respect (our mandate), it would penalize the economy even more”, she justified herself. This avalanche of communication had the effect of firmly anchoring the quantum of the future rise in the minds of the markets. They estimate the probability of a 75 basis point tightening at the end of October at 60%.

US rates not yet restrictive

A strategy which is also that of the Federal Reserve. The president of the Fed of Saint-Louis, James Bullard, was pleased that the message transmitted by the dots plot – the forecasts of evolution of the rates carried out by the governors of the American central bank – had been well “digested” by the steps. These estimates show no change in monetary tightening. The “Fed funds rates” should rise another 125 basis points between now and December to reach 4.5%. Cleveland Fed President Loretta Mester, for her part, estimated that the level of real rates (that is to say, corrected for inflation) “had not even entered restrictive territory yet”. In other words, they are not yet high enough to curb inflation.



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