Inflation surfs a risk-on wave
A wave of risk-on that began in the Southern Hemisphere lifted all boats today, rescuing the good ship of euro inflation after 9 days of decline threatened to sink 5y5y below 2%. A 4% surge in the Euro Stoxx was accompanied by a $3 rise in Brent and a 45 tick gain for the BTP. At the same time the Bund also finished in the green and EURIBORs rose by around 7bps amid an outbreak of (premature) hope that ‘peak rates’ could be coming into sight following weak US ISM data yesterday followed by the RBA’s smaller-than-expected hike today.
Germany’s small, €297m reopening of the Bundei-33 was easily digested and EUR inflation swaps gained 5.75-12.5bps, led by the front end as the curve bull-flattened. EUR 5y5y rose to 2.13%, up 7.25bps. And, in cash, OATei real yields fell by 5-17bps and BTPei real yields by 10-20bps.
Trades reported to the SDR (link) included EUR 10y at 2.26% early doors, then at 2.2775%, 2.315%, 2.345% and lastly 2.3325%. EUR 5y traded up to around 2.532% and 30y dealt at 2.4075%. Finally, FRF 5y went through at 2.74% and 2.735%.
Dutch funds under pressure to grant indexation: Aon
Consultant Aon’s latest ‘Pension Thermometer’ found that weak equities and falling bond values outweighed the positive impact of higher interest rates on liabilities for Dutch pension funds last month, with the indicative average funding ratio slipping to 122% September while the policy funding ratio fell to 118%. Still, the level funding is high enough to raise pressure for indexation as Dutch inflation continues to surge, hitting 17.1% for HICP last month.
“With the skyrocketing inflation, the purchasing power of retirees is a major concern,” said Frank Driessen, CEO of Aon Wealth Solutions. “With the current high funding ratios, it is difficult to explain if an indexation is not granted, while especially for the lower incomes." However, "we do not expect funds to be able to compensate for full inflation,” Driessen said, “there is simply not that much funding ratio. Funds would also like to keep a buffer for the transition to the new system.”
Driessen added, “funds that previously did not want to make use of the General Administrative Order, which offers additional indexation options for 2022, are now reconsidering. We expect that many funds will decide to add additional indexation in these last few months.”
Aon also considered the pension reforms making their way through the Dutch parliament. It concludes that, “all in all, it seems increasingly likely that the (target) date of January 1, 2023 will not be met. This is partly after the minister's statement that this date is not sacred as far as she is concerned.”
Wage growth no threat to core inflation: JPM
JP Morgan examines recent Eurozone HICP data and asks whether after cost-push inflation, wage pressure is next.
Surveying the landscape it concludes that inflationary pressures have been “supply-driven rather than demand-driven” so far, with commodity cost-push inflation boosting prices “broadly and forcefully.” JP Morgan continues:
- “The strong sensitivity of Euro area consumer prices to commodity-driven cost-push inflation suggests that consumer prices could be very sensitive to wage-driven cost-push inflation.”
“Our analysis suggest that wage inflation has (only) modestly increased toward 3% in 2Q22. And our tracker of German pay deals, which extends two to three years into the future, suggests that wage growth could increase toward 4%oya in 2023.”
“However, this is only 1.2%-pts above the 2017-2019 level, which at the time was consistent with subdued inflationary pressures (Euro area underlying inflation in that period was close to 1%oya). These limited wage increases are unlikely to derail the return of underlying inflation toward the 2% ECB objective over the medium term.”
“We expect core inflation to reach 2.2%oya in 4Q23, down 2.5%-pts from its current level.”