• The Eurozone rates market certainly has been going against our early September call that a year from now, money market conditions will remain easy enough for 1-month and 3-month Euribor to settle around current levels. That is: settle by about 3bps to 5bps below the ECB deposit rate of minus 50bps. At pixel time the September 2022 Euribor future was at 42bps. Such pricing could reflect odds of a rate hike and/or tighter liquidity conditions in the banking system. Before we try to find a reason why money markets have priced in a much tighter ECB policy rate path, we want to get this out of the way first: we still think the market has overreacted to inflation fears. Even if the ECB were to tighten much sooner than expected, a sharp decline in the size of the ECB’s balance sheet and/or a rate hike by September 2022 looks like a long shot. Having said that, we think it is important to take a closer look at futures and ESTR OIS pricing as they relate to ECB rates in the next 12 months.


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