Asymmetric reaction to oil keeps rates higher
Oil prices have eased from the recent highs, but the short end of the euro curve sticks to a relatively hawkish outlook. The last time oil hovered around $100, the 2Y swap rate was some 20bp lower. This is a familiar pattern, whereby up and down movements in oil have an asymmetric impact on rates. When oil prices hit new highs, the inflation impact leaves a lasting impact on inflation expectations, limiting the rate moves on the way down.
The asymmetric oil impact means the downside to euro rates could be limited over the near term. The European Central Bank keeps striking a hawkish tone, which supports the steep hiking profile. Also, the growth outlook remains robust, with eurozone PMIs mostly above 50 points. Having said that, we do anticipate some economic headwinds on the back of higher oil and gas prices. But given the resilience thus far since the start of the Iran war, our baseline remains for the economy to remain robust in 2026 and 2027.
A worsening growth outlook could, however, be a catalyst for a dovish repricing, but also not immediately. Even if we were to see disappointing PMI figures for the eurozone this week, the focus is on inflation. That doesn’t mean we can just ignore growth dynamics. The big fear for central banks is that higher inflation materialises through accelerating wage growth. A weakening growth outlook would mitigate this risk. Having said that, the very positive sentiment – see almost record equities – will limit markets’ sensitivity to one-off downside growth surprises.
Wednesday’s events and market views
The highlight will be country PMIs. The eurozone composite index is expected to tick slightly lower, but remain well in positive territory at 51.7. Consensus also sees relatively strong UK and US PMIs, both well above 50.
In primary markets, Slovakia will syndicate a new 10Y SLOVGB for an estimated €2-3bn. Germany will auction 21Y and 30Y Bunds totalling €2bn. From the US, supply includes a 2Y FRN for $28bn and a new 5Y Note for $70bn.
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