BNY strategist Geoff Yu argues that the sharp repricing of European natural gas futures has significantly overshot assumptions embedded in recent ECB staff projections. He notes that current curve levels imply Eurozone inflation could run well above baseline, forcing policymakers to consider rate hikes despite stagflation risks. The analysis highlights potential negative implications for Eurozone assets and real rates.
Gas curve threatens ECB assumptions
“We expect energy prices to remain volatile, but the ECB will need to prepare for all contingencies, especially given how liquefied natural gas prices feature directly in the baseline assumptions underpinning policy decisions.”
“Using futures curve pricing, figures last week showed a modest increase in prices through the next five quarters, which was already somewhat uncomfortable for the ECB, as its baseline forecast assumed lower natural gas prices this year.”
“As of Wednesday, the European natural gas benchmark curve has shifted to an average price baseline nearly 45% above last Friday’s figure and close to 60% above the original assumption.”
“These levels are well into the high-90th percentiles, which could point to HICP running about 100bp above baseline assumptions.”
“Consequently, we understand the market’s willingness to price a material risk of rate hikes – well ahead of peers. However, doing so would recognize stagflation risk emerging in the Eurozone, and we doubt this will benefit local assets accordingly.
“If anything, the balance of risks is an overreaction on the fiscal front, thereby augmenting inflation risk and depressing local real rates.”
