Energy sounds the alarm again, traders worry about the European Central Bank "hawkish stance"

The threat of a strike at an Australian natural gas plant has raised alarms in Europe's energy sector, with bond traders concerned that the European Central Bank (ECB) will take a more hawkish stance. According to an article by Bloomberg on Sunday, ING, Rabobank, and ABN Amro Bank expect the ECB to shift towards a hawkish stance as energy prices rise again, with officials aiming to prevent long-term inflation expectations from rising further.

Benjamin Schroeder, Senior Interest Rate Strategist at ING, stated:

Suddenly, the inflation alarm is sounding again. The recent volatility in natural gas prices highlights the ongoing risk of supply disruptions to the relatively moderate inflation dynamics in the near term.

According to a previous article by Wallstreetcn, workers at Chevron and Woodside Energy Group factories have voted to strike. Analysts believe that the strike could affect about half of Australia's liquefied natural gas export capacity and prompt many Asian buyers to turn to other sources for liquefied natural gas.

The next focus in the market is the inflation expectations survey to be released by the ECB on Monday. Currently, energy prices are troubling many European markets, including the UK, which is experiencing a natural gas shortage. The UK will release inflation data on Wednesday.

Despite ample winter natural gas supplies, European natural gas prices are still four times higher than those in the US, double the pre-pandemic levels. As energy prices soar, long-term inflation expectations reached their highest level since 2010 last week, leading traders to believe that it will be difficult for the ECB to justify ending this round of tightening.

Schroeder warned that the ECB may take a more determined stance to curb the risk of rising prices. He cautioned against making hasty moves and engaging in curve steepening trades, which involve betting that long-term bond yields will rise faster than short-term yields. He said the market should not underestimate the ECB's "determination and persistence."

Currently, the money market expects a 40% chance of a 25 basis point rate hike by the ECB in September, but a 66 basis point rate cut next year. Rabobank also stated that considering the risk of further energy shocks, the ECB may need to show "greater determination" in addressing inflation.

Lyn Graham-Taylor, Senior Interest Rate Strategist at Rabobank, stated, "Energy is indeed a key issue for the ECB." He leans towards focusing on the policy-sensitive five-year and thirty-year bond yield curves rather than the two-year and ten-year curves in steepening trades.

Althea Spinozzi, Senior Fixed Income Strategist at ABN Amro Bank, stated:

Energy is a component that keeps inflation at a higher level and above the central bank's target. Winter is approaching, and the demand for natural gas will increase.

Spinozzi expects the ECB to maintain interest rates unchanged for a longer period of time rather than further tightening. She is optimistic about the short-end yield curve, which is sensitive to policy changes, and expects the yield curve to flatten before October.