UBS Fixed Income-Global Rates Strategy _Rates Map Focus shifts to the June E...-108464315.pdf

ab31May2024GlobalResearchandEvidenceLabGlobalRatesStrategyRatesMap:FocusshiftstotheJuneECBmeeting˜WhiletheMayEurozoneinflationprintislikelytodisappoint,thesignalsthatemergedfromthelastECBpolicymeetingandrecentcommunicationfromGCmembersIsabelSchnabelandPhilipLanesuggestthattheECBisontracktocutratesby25bpsto3.75%intheupcomingmeetingon6June.˜TheexpectedECBpolicyeasingwouldlikelyprovideshort-termsupporttoEURrates,reducingthelikelihoodoffurthersell-offfromthealreadyhighlevels.˜ButforEuropeanratestorallysignificantlyfromthispoint,wewouldneedtoseemoreclarityontheECB"srate-cuttingcycle.TheECBappearslesscommittalafterJuneanditwillcontinuetofollowadatadependancestance,inourview.Our10yBundforecastisat2%byyear-end,butclearly,risksarenowtiltedtotheupside.˜Despitethebearsteepeningthisweek,weremaincautiousaboutwhetherthetimingisrightforstructuralsteepenersinthefront-endpartoftheEURcurve,suchasEUR2s10scurves.˜Structuralfront-endsteepenersshouldbe"bull"ratherthan"bear"steepeners,especiallyatthebeginningofaneasingcycle.Inflationuncertaintywilllikelypersist,keepingthe2s10scurveinvertedforalongerperiodoftime.Westillseemorevalueinlong-endcurvesteepeners.˜ThelongUSvsEURratestradehasgainedmoremomentum,resultingina35bpstighteninginSOFRvsESTR1y1ysincemid-April.ThistrendhasbeendrivenbyweakerUSactivitydataandimprovementsinEuropeaneconomicdata.Whilethecross-marketspreadishighfromahistoricalperspective,wethinkthatitwouldbechallengingforthespreadtocompressfurtherinthenearterm.TheECBappearsmoredovishrelativetotheFed,whileUSeconomicactivitydatahavereboundedfromrecentlows(Figure7USeconomicslowdownhasledtotighterUSvsEURspreads,butactivityindicatorshavepickedupmorerecentlyintheUS).˜AsidefromEurozoneandPCEinflationdatathisweek,theupcomingECBmeetingandNFPdata(releasedon7June)willbeimportantfactorsfortheevolutionofthespread.˜WestillfindvalueinthefrontendoftheUKcurveduetothesharprepricing,excessiveRPIpricing,andrecentweaknessinPMIs.˜WeprefertoexpressthisviewviareceivingAugustMPCmeeting,whichappearsattractivefromavaluationpointofviewat-8.5bps.DespitethedisappointingprintinApril,weexpectinflationtoreachcloseto2%inMayandJune.ThiscouldpavethewayforaratecutinAugust,withtheUKgeneralelectionsoutofthewayandthepotentialforsignificantfiscalgiveawaysmorelimitedinthenear-term.˜InSwitzerland,thefocusnextweekwillbeonMayPMIreport(outonJune)andtheMayCPIreport(outonJune4).UBSexpectsinflationtoremainunchangedat1.4%y/yinMay,butcoreinflationtorise0.2ppto1.3%.TheSwissCPIreportshouldprovidemoreclarityregardingpricepressuresfromrentincreasesandtheweakerCHF.˜Themarkethaspricedoutalmost5bpsofcutsthisweekfromthe20JuneSNBmeetingpricing(currentlyat-8bps),followingcommentsfromtheSNBChairmanJordan,whichsuggestedthattheneutralratemaybehigher.˜Wecontinuetoexpecttwomore25bpsratecutsthisyear(inJuneandSeptember),toaterminalrateof1%.However,risksleantowardsfewercutsgivenJordan"sreferencetoneutralrates,anduncertaintiesininflationoutlookandFXinterventions.ThisreporthasbeenpreparedbyUBSAGLondonBranch.ANALYSTCERTIFICATIONAN