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Hawkish Shift by Bank of England Triggers Significant Market Repricing

Northern Trust Asset Management Monthly Market Commentary for October 2021 – Exclusive Insight for TMI Subscribers

Eurozone Market Update

The European Central Bank’s (ECB) policy statement last month confirmed a “moderately lower” pace of monthly purchases under the Pandemic Emergency Purchase Programme (PEPP) than in the second and third quarters. Purchases under the Asset Purchase Programme will continue until “shortly before it starts raising the key ECB interest rates”. Interest rate guidance remained unchanged. ECB President Christine Lagarde pushed back on the market pricing a hike next year, indicating that “we do not see the conditions for liftoff to be met in 2022 or soon after”. Despite this, the rates market sold off across the curve as her more “explicit” comments regarding the end of the PEPP in March 2022 was taken as a hawkish signal. The market is pricing around a 20bps hike by the end of 2022.

UK Market Update

Speeches from Monetary Policy Committee members were increasingly hawkish last month. Governor Andrew Bailey said the bank will “have to act” to curb inflationary forces and warned higher energy costs mean price pressures will linger. These were the first explicit comments suggesting that the Band of England will be taking action on interest rates. Market expectations responded significantly, with close to a 15bps hike in November fully priced at the time of writing, and an expectation that rates will rise more than 100bps by the end of 2022 (see Chart of the Month). Despite that first hike being priced for November, it is important to note that key economic data, such as labour market data which will give an indication of the impact since the end of the furlough scheme, will only be available after the meeting.

US Market Update

On October 7, the US Senate voted 50-48 to approve a temporary $480 billion raise to the country’s debt ceiling. This allows the US Treasury to pay its debt until December 3. The increase has shifted the front end of the Treasury bill curve, with October bills rallying by 5 to 6bps and early December backing up by the same range. Investors have also begun to sell early December bills to avoid the new debt ceiling. October also saw, for the first time ever, the Secured Overnight Financing Rate (SOFR) drop below the Fed’s Reverse Repo Facility. Drivers for this included a temporarily elevated level of government-sponsored enterprise cash in the market and treasuries trading special in the repo and securities lending markets.