EURi: Bear-steepening as ECB and supply approach

Baloon inflation 9 Jul 2020
Euro inflation bear-steepened a tad today ahead of the ECB and French supply later in the week.

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  • Bear-steepening

  • Waiting for the ECB before resetting trades

  • New issues: CIC



    Euro inflation swaps bear-steepened and French inflation continued to underperform today in the wake of last week’s rise in the LivretA rate to 2% from 1%. EUR 1y fell to 6.435% (-4.25bps) and 10y fell to 2.45% (-0.75bps) while FRF-EUR 5y narrowed to 9.5bps (-0.5) from 13.5bps a week ago. In the background, the Bund lost 90 ticks, the Euro Stoxx gained 2% and oil prices recovered from lunchtime weakness to re-test $106, little-changed on the day.  In the data, final euro HICP inflation was confirmed at 8.6% for June with core also unrevised at 3.7%.   


    The SDR (link) shows EUR 12y swaps trading a few times including at 2.43375%, 2.43125% and 2.4325%. EUR 30y traded at 2.44%.


     Ahead, the AFT will sell €1.0-1.5bn in OATi-28, OATei-31 and OATei-53 on Thursday with the OATei-53 continuing to outperform while the OATi-28 lagged a touch.  


    Waiting for the ECB before resetting trades

    With EUR 5y5y5 back to around 2.09% (-0.75) today and an ECB rate hike looming, inflation strategists mostly refrain from strong directional calls:


  • Citigroup: “The ECB is about to embark on its tightening cycle at a time when measures of inflation compensation are stabilising at multi-month lows. However, there is no sign just yet that inflation expectations have fallen, with gyrations in inflation premium more likely.”


    “We find it too courageous to fade 5y5y at current levels, given 1) the uncertain macro backdrop, 2) lower liquidity over the summer, and 3) our existing long exposure in 2y3y HICP swaps (which we present as a way to play expected bouts of volatility), against 4) 5y5y remaining within our 2-2.3% fair value range. We hold a neutral stance on 5y5y HICP”


    “The ECB will be content to stay the course with their plan of coming hikes (not just because they announced they would) on the back of:


    1) Market expectations of average yearly inflation over their forecast horizon (i.e. until 2024) still above 2%, with the staff forecasts likely due an upward revision later this year. The ECB will also likely have in hand the results of the 3Q SPF survey to be publicly released the day after the meeting; 2) Risks of a wage-price spiral building up (see the ECB euro area wage tracker in Chart 8 of the 5th May Lane speech); 3) The weaker euro.”


  • Barclays: “The euro HICPx market is already pricing sub-target inflation in forwards between the 2y and 5y amid fears of a recession”.


    “We do not have particularly strong views directionally in breakevens…For now, we stick to last week’s long recommendation in the DBR€i26/33 forward real yield  as the market continues to focus on recession risks.”


    “We also maintain our recommendation to be short the 5y5y FRCPIx vs Euro HICPx…We maintain the view of a reversal given the extreme levels. Also, we see a possibility that the AFT skews its issuance towards OATis, to satisfy demand for FRCPIx.”


    New issues - CIC

    • CIC launched a €20m (max) self-led 10y inflation-linked note due 20 Jul 2032. The note is linked to euro HICPx but further details are unavailable.