ING notes that ECB officials have offered little resistance to hawkish market pricing as Oil rises, reinforcing front-end EUR rate expectations. However, a competing narrative of prolonged energy disruption is emerging, supported by President Lagarde’s comments that war-related infrastructure damage could impair energy supply for years, potentially forcing “forceful” monetary action and lifting rates across the 2y–10y sector in tandem with the front end.

Lagarde flags long-lasting energy risks

"And with European Central Bank officials giving little pushback to the hawkish pricing, we don’t see why markets would deviate from this trading strategy."

"However, another narrative is gaining traction as of late whereby energy disruptions will last much longer than initially feared."

"She [Lagarde] remarked that risks from the war are being underestimated and that the ECB's technical experts believe that damage already incurred to the infrastructure was enough to disrupt the energy supply for years rather than just months."

"Laying out the spectrum of possible responses just earlier this week, she said "large, sustained deviations call for forceful monetary policy action.""

"The front end is back to pricing more than three ECB hikes this year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)