Euro Area Rate-Inflation Mismatch Opens Trading Opportunities, BofA Says

Bank of America says that euro area interest rates and inflation expectations have become disconnected. The bank's strategist, Ralf Preusser, believes this mismatch presents trading opportunities as markets price in too many European Central Bank hikes.

Natural gas prices have surged since the start of the war in Iran, leading to a forecast of almost four full ECB hikes for the cycle. However, Preusser argues that this move is overdone, saying 'Even with the run-up in natural gas prices, futures markets are pricing in a scenario that is entirely consistent with the ECB’s base case.'

The bank expects hikes this year to be followed by cuts next year, but notes that neither the real nor nominal yield curve currently reflects this view. BofA favors receiver calendar spreads and 'gamma breakeven' trades pairing inflation longs with payer shorts.