ECB Rate Hike Looms as Energy Shock Deepens Market Uncertainty
The energy shock continues to impact markets as Brent crude tested its July high of $102 per barrel, a level not seen since May. European gas prices reached €80/MWh for the first time since January 2nd, 2023.
UK and European yield curves have been bear flattening, with UK Gilts underperforming due to potential hawkish repositioning following BoE Governor Bailey's acknowledgement of rising inflation risks. The UK 2-yr yield increased by 10 bps, testing the 2024 and 2026 highs at 4.71%. EUR swap rates rose by 7-9 bps in the 2-10 yr sector.
The ECB is set to deliver its second 25 bps rate hike today, aiming to contain upside inflation pressure from the energy supply shock. The central bank is expected to maintain a hawkish short-term message, aligning with market expectations of a third rate hike in December.