EURi: Bull-flattening as risk-on mood continues

Bull-flattening as risk on mood continues

The rise in euro inflation continued today as European bank shares (except for Deutsche Bank) recovered and the Bund fell 90 ticks with the global tone still tilted towards risk on. 

EUR inflation swaps gained 4 to 9 bps led by the front end of the curve, with the market closing at the day's highs after the market recovered from an initial slide. RPI and TIPS breakevens also widened, the latter by 5bps in 5y.

Still, even after today’s rise, EUR 5y at 3.55% (+6bps) remains 20bps below the levels tested on March 9, just before the news around SVB started to break. And 5y is more than 50bps under the March highs around 3.08% tested on March 6.

Shorter in, EUR 1y rose to 3.73% (+9bps) ahead of this week’s inflation data (see the section below) as gas futures recovered from early losses and oil extended yesterday’s rally by a dollar. EUR 5y5y edged up to 2.39% (+4bps) and 1y1y rose to 2.21% (+5bps) with the SDR showing €100m in 1y1y trading late in the session at 2.21%. EUR 3y traded a few times and last at 2.715%,  EUR 5y went through at 2.51%, 2.5125% and 2.538%, while EUR 15y traded at 2.5055%.

In cash, core real yield curves steepened as the front end rallied by 1-2bps while the long end backed up by 3bps. The BTPei-33 held broadly in line with the curve after underperforming in previous sessions ahead of today's €1.5bn auction with the bond covered 1.37 times at a real yield of 2.02%.  EUR 10y swaps finished 5bps higher at 2.47% after rallying from 2.43% following the auction.  

Core inflation expected to tick higher

Next up, preliminary HICP data start to print from Thursday morning onwards with the Bloomberg survey medians standing at: 1.6%mom/3.7%yoy for Spain; 0.8%mom/7.5%yoy for Germany; 0.8%mom/6.5%yoy for France; and 1.5%mom/8.8%yoy for Italy.

Euro flash inflation, due on Friday, is seen slowing to 1.1%mom/7.1%yoy from 8.5%yoy in February but core is expected to tick up to 5.7%yoy from 5.6%yoy.

Economists at Barclays are slightly above the Bloomberg consensus at 5.8%yoy for core but below the market at 6.9%yoy for headline (and expect 6.88% for euro HICPx) They preview the core data:

“Price momentum in non-energy components should broadly continue in March. We expect core inflation to accelerate by 0.2pp to 5.8% y/y (1.3% m/m), supported by seasonal effects and robust momentum in services prices. March Euro Area PMIs suggest price pressures have somewhat abated but still remain significantly elevated, especially in the services sector where inflation is likely increasingly driven by rising wages and firms’ mark-ups amid resilient consumer demand.”

As for the headline print, Barclays looks for weaker food price inflation (and increased energy price disinflation, with the yoy rate for energy expected to turn negative) to pull the headline rate down from last month:

“We expect food inflation to decelerate after a very strong print in February (fcst: 1.2% m/m; Feb: 1.7% m/m). Historically, fresh fruit and vegetables prices tend to correct quickly after posting a very sharp surge on a month. However, other food components and especially processed foods, beverages, alcohol and tobacco prices are likely to show only a modest easing in m/m inflation.”

 

“Energy disinflation should gain pace in March (fcst: -3.1% m/m; Feb: -1.1% m/m) as lower wholesale energy prices continue to pull down retail energy prices. Weekly pump price data suggest auto fuel prices are down 1-2% m/m across EA countries and liquid fuel prices are down 3-4% m/m. Gas and electricity price correction will also likely intensify as utility companies adjust prices lower reacting to the stabilisation of wholesale gas and electricity prices”

 

“We expect the effects of the full implementation of the Germany utility price cap on March inflation to be minor since the cap levels (gas: 12c/kwh; power 40c/kwh for 80% of consumption) are likely  above the average prices paid by households. Across EA4, we think the effects of utility disinflation could be more notable in Italy (gas) and Spain (electricity), while in France we forecast minor single-digit m/m disinflation since regulated tariffs are frozen after a 15% hike in January-February.”