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The Bar Was High

06 June 2019 by jbchevrel

The expectations of market participants were high, ahead of this GC. Draghi only had 4 meetings left and the fact that € HICP 5y5y came back to the 2016 lows wasn’t enough for the ECB to announce that its ready to step in (QE/rates). That measure is indeed around 1 ¼. Close to the lowest level ever. But maybe spot data paradoxically matters more. While a central bank should be forward-looking by definition, it was the negative inflation print in early 2015 which had arguably weighed much for the GC to launch QE. I think that in absolute, the GC was still dovish today, as rate hike guidance has been pushed back (by 6 months) to the end of H1-2020, and even explicitly opened the door to the next move being a cut. But that wasn’t enough, taking stocks lower, €$ higher and spreads wider. Itraxx Main backed up 2.5bp, senior Fin 5bp and Xo/Sub financial 9-10bp. In relative value terms sector-wise, SnrFin/Main rebounded to 17 ½ after dipping to close to 15 before the release. That echoed the move seen in stoxx benchmarks, with SX7E plunging 3.8% from 1300 to 1530. During the same time SX5E gave -1.2% and SXXP -0.9%. This is as we learnt about the TLTRO3 pricing. The cost for banks will be between 10bp and -30bp. Here the GC tried to be a tad more dovish than the consensus, which was seemingly more at -25bp. In sovereign space, peripheral spreads came wider. The 10-year BTP/Bund spread traded in mid-260s this AM before picking up to mid-270s and closed 273bp. 10y Bunds closed -24bp to the richest level ever. As inflation expectation market-based measures got hit, yield curves flattened, starting with Germany (-6bp in 2s30s), prolonging to the US (-3bp in 2s30s).