Bank of America said in a note Monday that euro area interest rate and inflation expectations have become inconsistent, offering trading opportunities as markets price in too many European Central Bank hikes. The bank noted natural gas prices have reached new highs since the start of the war in Iran, pushing markets to discount almost four full ECB hikes for this cycle. Strategist Ralf Preusser argued the move is overdone, saying that even with the run-up in natural gas prices, futures markets are pricing in a scenario entirely consistent with the ECB's base case. BofA said the weighted average of gas and oil implied by futures remains in line with the ECB's June base case and well below its adverse scenarios, and that significant upside surprises to energy prices would be needed for the central bank to do more than the 60 basis points of cumulative hikes embedded in those forecasts. Preusser explained that because the inflation market prices the peak around year-end while rate expectations have climbed, the real yield curve is now steeper in forwards than the nominal curve, a setup he sees as too steep, leaving real rates looking cheap. BofA expects hikes this year to be followed by cuts next year, a view priced by neither curve, and favors receiver calendar spreads, BTPei barbells weighted as forward flatteners, and gamma breakeven trades pairing inflation longs with payer shorts.
Bank of America CorpBofA's own strategist note highlights trading opportunities, potentially boosting its trading revenue.
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