ECB – Lower for longer.
The first press conference post the ECB’s strategic review carried little surprise. The ECB changed guidance to reflect patience on inflation, in line with the new symmetry requirements, indicating accommodative policy will likely stay there for several months after inflation hits target. No guidance was given on whether markets will get an extension on PEPP purchases, or on the APP program. Overall, the ECB maintains a dovish stance, partly because of a less advanced stage in the cycle compared to the US, and partly because of their overall more cautious stance. Euro rates tightened over the week, and we believe they should have less upward pressure than in the US or the UK, where inflation pressures are likely to be more persistent.

FED – Talking about tapering.
This week, the Fed is unlikely to give a clear hint about tapering. Still, the discussion is now well advanced within the FOMC, and internal discussions will continue to focus on timing, composition and pace. Fed officials have repeatedly suggested they will give “advanced notice” to markets for any start of tapering, so a 2022 start would be consistent with communication in the September meeting, two meetings before 2022 and just after the well anticipated Jackson Hole. Consensus is now for $15bn tapering per meeting, $10bn in Treasuries and $5bn in MBS. There is some discussion for a faster taper on the MBS side, given strength in house prices. Overall, the meeting should not be a gamechanger, and growth expectations and flows will be the main driven of rates for the rest of the summer.

Valuations – Watch travel & rates.
The past week had been volatile on the markets, with concerns on the delta variant and global growth hitting markets on Monday. While volatility increased a bit, most markets moved little compared to the past 3-6 months, and risk assets saw a partial comeback on Wednesday. So it is still early to see value, especially in credit, which moved little. Value mostly emerged in selected re-opening and rates. While European travel & leisure recovered all the losses experienced on the week, international-linked names have underperformed among travel and broad re-opening. A few of them remain quite cheap vs fundamentals, such as IAG, WH Smith, Dufry. The other area where some value is emerging is rates. US 10y tightened over the week, reaching a low of 1.12, just a few basis points above pre-vaccine levels. Even the current 1.30 level appears stretched, especially vs the past few inflation prints. Risk-reward in US rates remain quite asymmetric (skewed towards higher rates), especially less than one month away from the Jackson Hole meeting, which has the potential to prove the hawkish pivot for the Fed.

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