By Ven Ram, Bloomberg markets live commentator and reporter
Euro-area bonds and the euro are delicately poised ahead of the European Central Bank’s policy review today, with investors keen to parse the degree of hawkishness on display. Here’s what may be on the agenda:
1. Rate hike and guidance:
The ECB injected some frenzy into the market following news leaks that it may consider a bigger hike than the 25 bps it had flagged last month. The ECB is well aware that it is coming into the tightening cycle pretty late in the day, and considering that it has sprung repeatedly hawkish surprises this year, it may just decide to opt for a 50-basis point move. Traders are currently factoring in about 36 basis points of increase, about a halfway house between a dovish and hawkish outcome.
The ECB’s move today would also open up discussion on how much it could raise rates in September considering its guidance is that “a larger increment will be appropriate” should the inflation outlook worsen.
Of course, there has been a fresh bout of turmoil in Italian politics overnight, and it’s not clear to what extent the political theater in Rome will deter the ECB.
2. Anti-fragmentation tool:
From the looks of it, it appears that the ECB’s tool to contain peripheral spreads from blowing out is far from ready -- not dissimilar to what the state of play was about a month ago, when the monetary authority called an emergency meeting to discuss its backstop. President Christine Lagarde is reportedly working overtime to find an agreement on the so-called Transmission Protection Mechanism (translation into English: “How do we both raise rates and let our indebted economies still borrow at base-bottom rates?”).
If you tripped over reading that mouthful of a name for the tool, the ECB may find stiffer hurdles: should it just offer the tool gratis or should it link the backstop to conditions such as sound fiscal policy? Should it decide all the variables itself or should it involve the European Commission and other the European Stability Mechanism? Of course, you could ask whether it is even legal for a central bank to be so brazenly interfering with price discovery and perpetrating a moral hazard.
Assuming that the gift wrappers on the tool are put on in time for the meeting, investors will want to know the basics: when will the ECB come in, for what amount, how long will it hold onto what it is buying and how will it ensure that its rate hikes are effective without being overly punitive. A lot of questions, clearly. Chances are that, by the end of the afternoon, we may still be none the wiser on many of those posers.
3. Euro weakness:
Few things get the national press so excited as the euro fetching one-for-one against the dollar. Surely, some tabloid in France must have screamed “Parite!” last week. That obsession means that you may expect a fair few questions for Lagarde at today’s press conference. The ECB, she will tell us, doesn’t target any specific level on the currency, but is closely watching the euro as part of the many things it keeps an eye on.