Bank of Canada Preview: Another Cut as Tariffs Cloud Outlook

Economic

Summary:

We expect a 25bp rate cut by the Bank of Canada on 12 March, taking the policy rate to 2.75%, in line with market pricing. Despite strong fourth-quarter GDP growth, the US-Canada trade spat is fuelling recession concerns and we currently forecast another cut in the second quarter. We also expect the Canadian dollar to face more downside risks this spring

Recession fears rising

In the wake of weak growth, rising unemployment and subdued inflation, the Bank of Canada has cut its policy interest rate by 200bp over the past 10 months and is expected to follow up with another 25bp cut on Wednesday. This is despite surprisingly strong fourth-quarter annualised GDP growth of 2.6%, which was boosted by a temporary sales tax holiday that incentivised consumers to bring forward spending. Evidence from January suggests a return to the previous trend, and with the US in the process of implementing tariffs on imports from Canada, there are intensifying concerns about recession.

In a recent speech, Governor Tiff Macklem stated that “the economic consequences of a protracted trade conflict would be severe" with BoC models suggesting that the economy contracts as exports fall by around 8.5% before steadying and then returning to growth “but on a path that is about 2½% lower” than it assumed in January. After all, 76% of Canadian exports go to the US, equivalent to 20% of Canadian GDP.

Another insurance cut looks warranted

For now, Canada is in a state of reprieve with US President Donald Trump signing executive actions that delay the implementation of tariffs on products covered by the North American USMCA free trade treaty. However, with President Trump claiming he believes that trade tariffs can help reinvigorate the US economy whilst also raising much-needed tax revenues, the probability remains high that there will be a negative impact from trade protectionism.

Canada has already introduced tariffs on CAD$30bn of imported US products, and this will lift prices for items such as orange juice, appliances and motorcycles, but given that unemployment is 6.6% and inflation is broadly in line with the target, we believe the BoC has scope to implement another insurance rate cut.

Markets are fully pricing in a 25bp cut, but economists are more split, with 17 out of 25 economists expecting a 25bp cut and eight expecting no change to the overnight rate. We think the pace of cuts will slow after next week’s move and forecast just one further rate cut coming in the second quarter.

Canada's inflation and unemployment

Bank of Canada Preview: Another Cut as Tariffs Cloud Outlook_1

CAD: Downside risks still dominate

USD/CAD has been settling around 1.43-1.44 after Trump’s second postponement of 25% tariffs. Current trading levels embed around 2% of risk premium into CAD. That is only half of the peak risk premium in early February (4%), and USD/CAD is now also embedding a markedly more dovish view on Fed cuts.

Our view for the coming months is that downside risks for CAD remain in place. Even without a flat 25% tariff, Canadian goods are being selectively targeted by the US, and once the “reciprocal tariff” phase kicks off in April, Canada should be disproportionately affected due to its high export volumes to the US.

As we expect the US dollar to appreciate into the summer on the back of US tariffs, USD/CAD can find support beyond the 1.45 level before easing back towards the low 1.40s in late 2025, when US protectionism may start to be scaled back.

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ING

Economic

Germany's fiscal plans have hit first stumbling blocks, but markets assume the change in the German fiscal attitude sticks. The front end of the EUR curve is held up by tariff uncertainty, but the path is to a 3% handle for 10y Bunds. US Treasuries are not reacting to this, but to elevated domestic angst on a complex policy prescription laced with uncertainty

US Treasuries remain enamored by 4% as a target for the 10yr

Severe risk-off and elevated volatility characterised a rough day for US markets. No Monday crash here, but certainly a slow-grind move south, extending from preliminary weakness last week. Only one way to go for US Treasureis on the back of this, as the 10yr homed in on the 4.2% area. The dominant driver here is a self-harming process coming from the complex policy prescription being shown to the markets, and the back story is one of a resurgent Europe versus a more isolated United States, or the perception thereof. Whether this sticks remains to be seen, but it's a theme that's likely to persist a bit until or unless negated by events or new information.

For the US 10yr yield, there is a natural tendency for the 4% area to be aimed for, especially given the latest mood music. Room is gradually being made for a test lower as the Fed funds future strip continues to edge lower. At the beginning of the day the terminal rate was in the 3.5% area. It's now approaching 3.25%. At the same time the 10yr swap spread has been on a re-widening tendency, acting to limit the full feed-through of the deeper rate cut expectation on the 10yr yield. This, plus the new found resilience out of Europe, is dampening the extent of movement in the 10yr yield to the downside.

For the 10yr yield to get and stay through 4%, there would need to be an even deeper rate cut discount, one that verges on outright recession. We're not quite on that wavelength yet, but watching it carefully.

Despite hitting first stumbling blocks, the German fiscal rethink sticks with long-end rates

The 10yr Bund started the week with yields retracing slightly back towards 2.8%, but that is still up 40bp versus the end of February. Where we are still seeing the repercussions of the European defence rethink and Germany’s turnaround on fiscal conservatism play out further is in the curve itself and the decoupling of US and EUR long-end rates. The 2s10s EUR swap curve has even managed to slightly extend its steepening from last week to now stand at 37bp. The 10yr US Treasury-Bund spread has now narrowed to below 140bp on Monday coming from 184bp at the end of February.

The EUR short end is still looking at the European Central Bank with a degree of caution, though. A terminal rate at 2% still seems to be the base case – or better the market's middle-ground – in light of uncertainty surrounding especially US tariffs on EU imports even as it seems to be desensitised to tariff headlines given the US administration's back and forth on the topic. Terminal rate pricing is up by about 15bp versus end-February, but was up by more than 20bp briefly over the past few sessions. However, even those levels were not unprecedented this year – one only needs to go back to late January. After listening to Lagarde last week, our economists think the ECB may well stop easing at a deposit facility rate of 2.25%. But this scenario will need more clarity, also on the implementation of German spending plans.

10yr Bund yields – and more relevant here – spreads over swaps have shown a limited reaction to the headlines as Germany’s proposed package of a €500bn infrastructure funds and debt brake reform hit the first stumbling block on Monday. While this suggests markets are in a waiting mode, the moment of imminent 'peak supply fear' also seems to have passed. At the same time there is also the sense there is no turning back from the change in German fiscal attitudes in a more general sense, allowing the levels to stick.

But if the market's ECB pricing were to move higher on more clarity that stimulus will pass in the coming two weeks, then the path for 10yr Bund yields to move towards 3% would become much clearer.

Tuesday’s events and market view

The data calendar is light on Tuesday with the main event the US JOLTS job openings data for January. On the EUR side, headlines surrounding the passage of the German fiscal package will remain at the centre of attention. We will also be listening to the ECB’s Rehn speak on the economic outlook and monetary policy. The EcoFin meeting of EU finance ministers will also be attended by the ECB’s VP de Guindos.

In primary markets the EU syndicated sale of a new 10yr benchmark will be the main event with an anticipated volume of around €7bn. Germany will also auction 2yr bonds for €4.5bn. Outside EURs, the UK sells a new 25yr gilt linker via syndication and the US will auction new 3yr notes ($58bn).

To stay updated on all economic events of today, please check out our Economic calendar

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Alex

Economic

Korea's top envoy for international investment cooperation has called for the enhancement of bilateral industrial cooperation with the United States in advanced industries during his ongoing visit to Washington, Seoul's industry ministry said Tuesday.

Choi Joong-kyung, ambassador for international investment cooperation, made the call during a seminar on industrial cooperation between Korea and the U.S. with the Heritage Foundation, a major think tank based in Washington, according to the Ministry of Trade, Industry and Energy.

Choi has been on a trip to the U.S. since Feb. 28 to seek ways to bolster bilateral cooperation in various industries amid rising concerns over the Donald Trump administration's push for a new tariff scheme.

In the seminar, Choi called for advancing bilateral cooperation in six major sectors — shipbuilding, defense, artificial intelligence (AI), nuclear power plants, energy and batteries.

The two countries will be able to strengthen their competitiveness in the global market if they can integrate the U.S.' cutting-edge technologies and Korea's manufacturing infrastructure, Choi said, according to the ministry.

He also stressed the need for consistency in U.S. policies, such as the CHIPS Act and the Inflation Reduction Act, to create an environment for continued investment by Korean firms in the U.S.

The ministry said Choi plans to visit five other major U.S. think tanks and institutions, including the U.S. Chamber of Commerce and Peterson Institute for International Economics, this week as part of efforts to bolster bilateral industrial cooperation.

Source: Koreatimes

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FastBull Featured

Daily News

[Quick Facts]

1. Canada retaliates against U.S. tariffs amid escalating trade war.

2. Japan's Q4 GDP revised downward, yet supports rate hike expectations.

3. Germany's defense spending plan triggers sovereign bond sell-off.

4. NY Fed Survey: Consumers grow pessimistic on economy, but long-term inflation expectations hold steady.

[News Details]

Canada retaliates against U.S. tariffs amid escalating trade war

On March 10, David Eby, the Premier of British Columbia, Canada, announced that all U.S.-made alcoholic beverages would be removed from shelves in the province's liquor stores. Eby stated that this move was in response to the United States' ongoing threats to impose additional tariffs on Canadian goods entering the country, as well as President Trump's intention to redraw the Canadian-U.S. border. He added that legislative tools are being employed to counter the impending steel and aluminum tariffs.

Additionally, on March 10, Ontario, Canada's largest economy, declared that it would impose a 25% tariff on electricity exports to the United States. This measure is part of Canada's broader retaliatory response to the tariffs imposed by President Trump on Canadian goods. Ontario officials noted that the new tariffs would increase the cost of electricity exports to the U.S. by approximately CAD 10 per megawatt-hour. The U.S. states importing electricity from Ontario include New York, Michigan, and Minnesota, among other border states, serving around 1.5 million customers. Ontario Premier Doug Ford indicated that households and businesses in these states could see their monthly electricity bills increase by CAD 100.

Japan's Q4 GDP revised downward, yet supports rate hike expectations

Japan's economic growth in the fourth quarter was revised downward, but it still marked the third consecutive quarter of expansion. The latest data shows that the country's real GDP grew at an annualized rate of 2.2% in the final quarter of 2024, down from the initial estimate of 2.8%. On a QoQ basis, Japan's economy expanded by 0.6%, driven by a 0.6% increase in capital expenditure, which was revised up from the initial estimate of 0.5%. However, private consumption was revised down from 0.1% to 0.0%, reflecting a slowdown in consumer spending.

Despite the slower recovery than previously anticipated, the sustained economic growth could support expectations that the Bank of Japan (BOJ) may raise interest rates again in the near future. However, risks remain, including potential disruptions to business activity from U.S. President Trump's economic policies, such as higher tariffs. Exports were the main driver of Japan's Q4 economic growth, with net external demand (exports minus imports) contributing 0.7 percentage points to GDP growth.

Germany's defense spending plan triggers sovereign bond sell-off

German government bonds experienced their worst selloff in over 20 years last week, with long-term bonds facing significant selling pressure. This turmoil has given new momentum to one of the bond market's most popular trades in Europe: the "curve steepening trade." This strategy bets on long-term bonds underperforming short-term debt. The market movement intensified after Germany announced plans to invest hundreds of billions of Euros in defense and infrastructure, leading to a sharp rise in bond yields.

Specifically, the spread between 2-year and 10-year German bond yields saw its largest increase in two years, reflecting investors' expectations of higher inflation and stronger economic growth driven by increased government spending.

NY Fed Survey: Consumers grow pessimistic on economy, but long-term inflation expectations hold steady

According to the latest monthly survey report released by the Federal Reserve Bank of New York, consumers' median inflation expectations for the next year rose slightly from 3.0% in January to 3.1% in February. Meanwhile, inflation expectations for the three-year and five-year horizons remained unchanged at 3.0%, indicating a stable long-term outlook.

The survey also highlighted that Americans expect faster price increases for gasoline, food, medical care, and rent. Consumers' overall economic sentiment has become more cautious and anxious, with notable deterioration in expectations for unemployment, delinquency, and credit access.

In contrast, the University of Michigan's consumer survey, another key indicator of inflation expectations, reported a significant increase in long-term inflation expectations. The five-year inflation expectation final value for February soared to 3.5%, the highest since 1995, while the one-year expectation reached 4.3%, the highest since November 2023.

The substantial gap between the New York Fed and University of Michigan surveys has raised questions among policymakers. "Timely Louss," often referred to as the "New Fed Communications," noted that the sharp rise in inflation expectations observed in the University of Michigan survey was not reflected in the New York Fed's February consumer survey. The stability of medium- and long-term inflation expectations is a positive signal for Federal Reserve policymakers, who closely monitor these indicators. Inflation expectations are crucial because policies from the Trump administration, such as immigration restrictions and tariffs on major trading partners, could slow economic growth and exacerbate inflationary pressures. Federal Reserve officials have indicated that if long-term inflation expectations remain stable, they may choose to overlook price increases resulting from tariffs.

[Today's Focus]

UTC+8 17:00 ECB Governing Council Member Rehn to Deliver Speech

UTC+8 18:00 U.S. February NFIB Small Business Confidence Index

UTC+8 22:00 U.S. January JOLTS Job Openings

UTC+8 00:00 EIA to Release Monthly Short-Term Energy Outlook Report

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Owen Li

Economic

Japan's trade minister on Monday said he asked the United States not to impose trade tariffs on his country, but did not win any assurance that Japan would be exempt, including from a 25% steel and aluminium duty set to start on Wednesday.

"We agreed to continue close consultations with the US government and to hold discussions at the working level as soon as possible," Yoji Muto said in Washington DC, after meetings with Secretary of Commerce Howard Lutnick, US Trade Representative Jamieson Greer, and White House economic adviser Kevin Hassett.

In a bid to persuade US President Donald Trump to exempt Japan from tariffs on cars and other products, Muto and other senior Japanese officials are touting Japan as a close economic partner that has invested heavily in the US economy and created millions of jobs.

The new 25% tariff rates on steel and aluminium imports into the United States are set take effect on March 12, according to the executive orders signed by Trump last month.

In talks with his US counterparts, Muto said they also discussed Japan buying more US liquefied natural gas (LNG), a gas pipeline project in Alaska, and Nippon Steel's bid to buy US Steel.

Source: Theedgemarkets

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Warren Takunda

Cryptocurrency

Bitcoin starts the second week of March at a bearish crossroads as new multimonth lows get closer.

Traders and analysts agree that little stands in the way of a $78,000 retest as BTC/USD seals its worst-ever weekly candle.

CPI and PPI are due as markets enter a broad risk-off phase and stocks’ futures tumble.

How low can Bitcoin go? Old $69,000 all-time highs from 2021 are back on the menu.

Sentiment is on the floor, and not just in crypto, but not everyone believes that the situation is really all that bad.

Whales have been buying throughout the past week, indicating a solid risk-return basis at current price levels.

BTC price dives 14% in a week

Diving to $80,000 into the weekly close, Bitcoin’s latest weekly candle stands out for all the wrong reasons.

In US dollar terms, BTC/USD shed more value in seven days than at any time in history, data from Cointelegraph Markets Pro and TradingView shows. Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_1

Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_1

BTC/USD 1-week chart. Source: Cointelegraph/TradingView

So far, bulls have narrowly avoided a rematch with multimonth lows from late February, but among some Bitcoin traders, the mood is predictably cautious.

“Bitcoin is back in the critical zone of the weekly parabolic trend,” analyst Kevin Svenson wrote in his latest analysis on X.

“We are still holding the current lows of last week, no new low has been created yet. This is $BTC's last chance to maintain an exponential higher low.” Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_2

Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_2

BTC/USD 1-week chart with parabolic trendline. Source: Kevin Svenson/X

Trader SuperBro joined those preparing for a $78,000 rematch.

“Closed above the prior candle’s low and 50% level, but cracked the uptrend from Oct ’23,” a reaction to the weekly close stated.

“A candle like that rarely turns on a dime, so despite bullish divergences on the LTF I'm prepared for a sweep of the lows.” Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_3

Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_3

BTC/USD 1-week chart. Source: SuperBro/X

Others sought more data to confirm a truly bearish breakdown.

“Are we in a bear market now? Simply no. There isn’t enough confluence to confirm that at all,” trader CrypNuevo argued in a dedicated X thread.

Even for him, however, new lows were on the cards, with the area around $77,000 particularly important.

“We can see some liquidations exactly at $77k in HTF, although they are not as reliable as LTF liquidations,” he continued. Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_4

Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_4

BTC order book liquidity data. Source: CrypNuevo/X

CPI week overshadowed by market nerves

This week’s key US macroeconomic data releases are not in short supply, but markets are already flipping to an increasingly “risk-off” stance.

The February print of the Consumer Price Index (CPI) and Producer Price Index (PPI) are both due, along with the familiar job openings and jobless claims figures.

Both CPI and PPI overshot the mark last month amid an inflation rebound, which shook mark confidence.

Since then, neither crypto nor stocks have succeeded in recovering, and with the next Federal Reserve interest rates decision coming next week, there is little sign of optimism.

The latest data from CME Group’s FedWatch Tool puts the odds of a cut on March 19 at just 3%. Meanwhile, the Fed’s May meeting is seeing rate-cut odds rapidly decrease. Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_5

Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_5

Fed target rate probability comparison. Source: CME Group

“Amid all the trade war chaos, we have seen economic growth expectations crash sharply,” trading resource The Kobeissi Letter wrote in part of its latest X analysis.

“The Atlanta Fed reduced their Q1 2025 GDP growth estimate to as low as -2.8% last week. As a result, we saw interest rate cut expectations move up SHARPLY last week.”

Kobeissi noted that on short timeframes, stocks were gearing up for a “red” open.

“Crypto’s decline was a clear indication of growing risk-off sentiment this weekend,” it summarized.

Back to 2021 for BTC price?

Regarding BTC price bottom targets, the landscape is looking ever more nerve-racking for bulls.

With $80,000 hanging in the balance, one classic forecasting tool suggests that a reliable floor may only lie at an old Bitcoin all-time high — not from last year, but from 2021.

Created by network economist Timothy Peterson in 2019, Lowest Price Forward effectively delivers BTC price levels that will not be violated in the future.

In mid-2020, it correctly predicted that BTC/USD would never trade below $10,000 from September onward.

Now, the new line in the sand lies somewhere around $69,000.

“Lowest Price Forward doesn’t tell you where Bitcoin will be. It tells you where Bitcoin won’t be,” Peterson told X followers in a recent post this month.

“There is a 95% chance it won't fall below $69k.” Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_6

Bitcoin Lowest Price Forward chart. Source: Timothy Peterson/X

Peterson’s tool is not alone in eyeing new macro lows for BTC/USD to come.

As Cointelegraph reported, calls for a trip to the mid-$70,000 range are growing, with Bitcoin’s 50-week simple moving average (SMA) a key target at $75,560.

The 200-day SMA, traditionally a bull market support line, failed as support around the latest weekly close for the first time since last October. Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_7

Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_7

BTC/USD 1-week chart with 50-week, 200-day SMA. Source: Cointelegraph/TradingView

“An ugly start to the week,” Arthur Hayes, former CEO of crypto exchange BitMEX, wrote in response, referring to open interest (OI).

“Looks like $BTC will retest $78k. If it fails, $75k is next in the crosshairs. There are a lot of options OI struck $70-$75k, if we get into that range it will be violent.”

The current multimonth low of just above $78,000 came at the end of February.

Crypto, macro sentiment match historical lows

It is no secret that Bitcoin and wider crypto market sentiment is struggling in the current environment, but the extent of the bearishness may come as a surprise.

The latest data from the Crypto Fear & Greed Index puts the overall mood firmly back in the “extreme fear” zone, with the market enjoying a mere one-day break last week.

The Index has seldom been lower in recent years, with Bitcoin’s trip to $78,000 last month sparking a three-year record reading of just 10/100. Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_8

Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_8

Crypto Fear & Greed Index (screenshot). Source: Alternative.me

It is not just crypto. As noted by finance and trading resource Barchart, stocks are also nervous, to an extent rarely seen this century.

“Sentiment is extremely bearish, which is actually bullish,” Peterson argued about the same data.

“Lowest reading since the bottom of GFC and COVID crash. Markets soared after that. Opportunities of the decade.” Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_9

Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_9

Source: Barchart

Professional Capital Management founder and CEO Anthony Pompliano called on crypto investors not to pay attention to sentiment gauges at all.

“The Fear & Greed Index for crypto one year ago was at ‘Extreme Greed’ of 92. Today we are at ‘Extreme Fear’ of 17. Bitcoin is 20% higher over the same time frame,” an X post from March 10 reads.

“Don't get tricked by online sentiment. It is all noise.”

Bitcoin whales wake up

Is there light at the end of the tunnel of what has become a hefty crypto bull market pullback?

Positive cues may be few and far between, but for research firm Santiment, one stands out: large investor accumulation.

Over the first full week of March, it shows, Bitcoin whales and “sharks” — entities with 10 BTC or more — felt it appropriate to start increasing their BTC exposure again.

“In short, their mild dumping from mid-February to early March contributed to crypto’s latest dump,” Santiment wrote in part of X commentary.

“But since March 3, wallets with 10+ $BTC have accumulated nearly 5,000 Bitcoin back into their collective wallets.” Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_10

Biggest Red Weekly Candle Ever: 5 Things to Know in Bitcoin This Week_10

Bitcoin whale, shark accumulation. Source: Santiment/X

Researchers acknowledged that price action has yet to reflect their conviction, but a delayed response could well mean that the market sees a fresh relief rally next.

“Prices have not reacted to their buying just yet, but don’t be surprised if the 2nd half of March turns out much better than the bloodbath we’ve seen since Bitcoin's ATH 7 weeks ago... assuming these large key stakeholders continue their coin collecting,” they concluded.

Source: Cointelegraph

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ING

Economic

The euro swap curve is still exceptionally flat by historical standards and forwards don’t price any moves from here. With growth holding up, underpriced structural inflation risks and EU spending plan discussions, we see potential for more bear steepening of the 5s10s curve. If recession risks intensify, then we'd see a bull steepening

The euro curve in forwards is still exceptionally flat

When we look at the steepness of the euro swap curve in forwards, we see exceptionally flat curves compared to historical norms. The 5s10s in spot rates is strongly influenced by rate cut expectations, which are for a large part expressed by rate expectations in the immediate two years. By charting the 5s10s curve in two-year forwards, we implicitly filter for any near-term monetary policy expectations.

The last time the 5s10s in forwards space was this flat was around 2007, which was when the European Central Bank was hiking rates to address rising inflation. Policy rates were deemed restrictive at this time, flattening the curve. With the ECB currently moving towards a neutral or even supportive monetary policy stance, we would expect more steepening to materialise than so far has occurred.

Curves are still as flat as during the ECB’s previous hiking cycle

A Volatile World Warrants EUR Steepeners_1

Markets are preventing steepening on structural fears

Curves remain exceptionally flat because markets take a very pessimistic view on the structural outlook of the eurozone. A potential trade war, an actual war, and political uncertainty in France and Germany are all preventing markets from normalising. The 5Y5Y forward inflation swap reflects this pessimism with the risk premium now close to zero, weighing down the 10y swap rate.

Inflation swaps in line with expectations suggests little risk premium

A Volatile World Warrants EUR Steepeners_2

We see two potential scenarios for where the yield curve will steepen from here: 1) a gradual economic recovery with a rebuild of the term risk premium, or 2) through a sharp rise in recession risk triggering a bull steepening. Our baseline is for a gradual recovery and recent data supports this direction. Talks about defence spending and broader EU reforms can help markets grow more convinced of this as the likely path forward. In contrast, if we do see an escalation of geopolitical risks, then the ECB could be quick to resort to more cuts. Inflation is sticky, but below 3%, and any severe risks to growth can therefore trigger a steepening from the front end.

We don’t believe the current yield curve can be an equilibrium outcome, although curves can remain flat if risks keep lurking but never materialise. The uncertainty would prevent the term premium from rebuilding while the front end of the curve would remain where it is. It’s hard to imagine a flattening move from here given the already stretched positioning. One would have to see inflation risks pick up while the longer-term growth outlook gets challenged at the same time. As such, the balance of risks favours a steepening of the 5s10s from here.

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