ECB and Fed rate outlook (with Tom, Guy, Anna)

Camille de Cousel

July is live for the ECB, but we see them going in September. To move in July, we'd need to move away from the intermediate scenario Lagarde described to a persistent one, meaning much higher energy prices or a very important shock.

As long as we are in the intermediate scenario where the ECB sees a very large but not too persistent shock, they will remain measured and deliver quarterly hikes.

Camille de Cousel

Schnabel's comments suggest she is deviating toward a more extreme scenario, characterizing the shock as very large and very persistent. The strength of the economy will determine how much tightening is needed; a stronger economy means more tightening.

The ECB was very upbeat on growth, so risks are skewed towards more than two hikes being delivered, potentially the start of a proper tightening cycle.

Camille de Cousel

The Fed conversation is different due to the transition to a new government. Powell did not want to lean the Fed in a certain direction before the new administration. Next week, Warsh will set the scene; we expect a move to symmetric bias.

If Warsh leans hawkish, the market could start pricing a lot more. The market has been convinced the Fed will deliver cuts, but we see three hikes starting December, which is not yet fully priced.

Camille de Cousel

We see upside risks to yields at the front end, and at the long end, June is the heaviest month for supply across G4, yet term premium has compressed back to very low levels. Asymmetry is still skewed to the upside.

We have more conviction on the direction of yields than on the curve shape, especially in the US.

Camille de Cousel

We expect the BoE to remain on hold next week but deliver two hikes ultimately, with the next move in July.

Camille de Cousel

If Andy Burnham wins the by-election, it will refocus attention on fiscal risk in the UK, including the next governor and fiscal rules. There is room for more volatility in bond yields.

Term premium in the UK is back to lows, so any fiscal news could cause a repricing.

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