ECB Stands Hawkish

FOMC meeting overshadows hot data, sends rates lower. Swap rates and Treasury yields fell across the curve today as the market continued to digest yesterday’s FOMC activity. Rates declined despite hot retail sales and NY manufacturing data, the latter coming in well above the forecast of -15.1 at 6.6. The 2-year yield ended the session 5bps lower at 4.64% after peaking at 4.78% in the morning. The 10-year yield fell 7bps to 3.72%. 

Hawkish ECB announcement contrasts with policy themes in other advanced nations. Following a Fed pause, the ECB increased the European deposit rate by 25bp to 3.5% today, with ECB President Lagarde describing a further hike in July as “very likely,” and noting that the ECB has not considered pausing. Looking beyond July, analysts widely expect the ECB to pause rate hikes, supported by headline and core European inflation coming in lower than expected in the latest readings. Still, money-market traders instead boosted their hiking expectations, implying an ~80% chance of the ECB raising rates to 4% by October, and policymakers raised their European inflation outlook. The ECB’s firmly hawkish announcement is in contrast with other advanced economies that have tempered their hawkishness with pauses, but have also positioned themselves to resume hikes if needed. Both Canada and Australia followed pauses with rate hikes, and the Fed is widely expected to hike again in July.

Day ahead. Fed members James Bullard and Christopher Waller will lead the day with public comments in the morning. Michigan consumer sentiment will follow at 10 AM ET.