The bloc's numbers are due on Tuesday next week. The ECB on Thursday enters its quiet period prior to its May 4 policy meeting, after hawks on its governing council banged the inflation drum for days, setting their sights on a deposit rate of at least 4% at the end of its tightening cycle.
Germany's 10-year government bond yield , the euro area's benchmark, rose 4 basis points to 2.42% after dropping by around 10 bps in the last two sessions. It was still 35 bps below its highest since July 2011 at 2.77%, hit in early March, and more than 40 bps above its lowest reached in mid-March, when fears that a full-blown banking crisis might be brewing were at their height. The interest rate derivatives market remained relatively stable. November 2023 ECB euro short-term rate (ESTR) forwards were last at 3.65%, implying expectations for a depo rate of around 3.75% by then, after briefly rising to 3.8% early this week, which would indicate a depo rate of 3.9%. Markets price in a 25% chance of a 50 bps rate hike next week, while a fairly large consensus is building around expectations of a 25 bps hike. Euro swap spreads - a market stress indicator - widened sharply in the last few days as fears of a U.S. banking crisis returned to centre stage. The gap between two-year euro swap rates and two-year German bond yields was at 74 bps, after widening to a one-month high at around 82 bps earlier this week. "The Bund ASW (asset swap spread) is not just an indicator of risk sentiment, but technical factors such as collateral scarcity have also been important drivers of the spread," Antoine Bouvet, head of European rate strategy at ING, said. In early March, ECB board member Isabel Schnabel warned that asset scarcity could delay or even impair the transmission of monetary policy.
With investors also closely watching developments on the U.S. debt ceiling, yields in one-month Treasury bill jumped more 27 bps. On Wednesday, the U.S. House of Representatives narrowly passed a bill to raise the government's $31.4 trillion ceiling that includes sweeping spending cuts over the next decade. The bill is not expected to pass the Senate, and President Joe Biden would veto it if it did.
First Republic Bank's market value plunged again on
Wednesday as investors waited to see if it could find buyers for
assets and engineer a turnaround without government support.
(Reporting by Stefano Rebaudo, editing by John Stonestreet and
Andrew Heavens)
