ECB October hike looks unlikely, Lagarde strikes a 'surprisingly dovish' tone

After a September of frantic central bank activity, October is shaping up to be the month where policymakers almost everywhere put their feet up.

Recent macroeconomic data seems insufficient to force the hand of either the Fed or the ECB this month. In the US, the softer core PCE inflation and nonfarm payrolls reports cement our call for no change, and seem to have put to bed any lingering speculation that the FOMC could deliver back-to-back hikes.

ECB President Lagarde, meanwhile, struck a surprisingly dovish note last week, and we don’t think that the September inflation beat will be enough to sway the Governing Council just yet - though a hike in December still remains on the cards.

Interestingly, policymakers broadly seem to be becoming increasingly vocal about something that we have been saying for a while - that higher yields should limit the need for central bank hikes. The sell-off in government bonds effectively acts to tighten financial conditions, pushing up things like mortgage rates and corporate borrowing costs, doing much of the heavy lifting for central banks.

Lagarde said as much last week, arguing that the notable rise in long-term rates since the September meeting will slow growth and ease the pass-through of energy costs to inflation. Fed officials Logan, one of the more vocal hawks, and Williams have urged caution due to the impact of rising yields on the US economy and we wholeheartedly agree - a big reason why we think rate hike expectations remain overly aggressive across the board.