European Macroeconomic Strategy

The European Central Bank (ECB) reported in their Account of the monetary policy meeting on December 13-14, 2017 that their language pertaining to forward guidance could be adjusted "early in the coming year", which we took to mean any of the Q1 Governing Council meetings (January 25 or March 08). However, quickly thereafter and following a sharp market reaction to the Account – higher rates, flatter curve, and appreciating euro – the ECB then made no changes to forward guidance at the January meeting.

Put together, the ECB’s rhetoric indicates that the Governing Council will inch its way out of a highly accommodative, emergency, policy stance amid a robust economic upswing but with a penchant for stability in rates.

In this piece we map out our basic macro strategy for Bunds, which forms our core view on the direction of yields and the curve.

Macro strategy: Rates will move higher in line with the business cycle but the ECB will try to steady the uptrend. The output gap is closing, though, where macro data is likely to drive the ECB into a more hawkish framework sooner rather than later. Timing is highly uncertain, though.

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