With bond yields in Europe having retracted a third of the sell-off, the ECB is not expected to go as far as announcing new easing measures at the Sep meeting, despite the downside risks to their inflation forecasts.
In the past month, QE failure risks have receded from a rates perspective, and recent data has been strong despite the events in China and FX markets. The ECB is likely to appear very dovish due to the change in inflation outlook but the potential levers for it to react with more than just rhetoric at this stage are arguably limited.
"We expect all eyes to be on the Fed. Our economists still expect the first rate hike for Sep. We therefore see scope for Bunds to surrender the leadership role in the rates market back to USTs at least until the ECB is forced into more easing, potentially in December", notes BofA Merrill Lynch.
The other key driver of Bunds is likely to be the pick-up in gross and net government bond supply in September, which should put some upward pressure on yields, especially if coupled with larger than usual fixed EUR-denominated corporate bond issuance.
