EURi: B/Es up as duration weak again; EIB linker

B/Es wider as duration falls

A steady selloff in global duration provided support for euro inflation today with a 6-9bps rise in longer dated core real yields versus a 11-13bps  jump in nominals. Price action in natural gas futures, which tested €30 and lost around 5%, was unsupportive, and Brent futures fell by a dollar. However stocks rose and TIPS held up OK, with 10y TIPS breakevens little-changed shortly before the $15bn re-opening.  

Cash breakevens widened by 4-5bps while in swaps the move was closer to 1-4bps, with the wings of the swaps curve lagging a touch. EUR 1y fell back from early highs to finish at 2.85% (+1bps) and the 5y area of the EUR curve was strongest at 2.40% (+4bps). EUR 5y5y close around 2.46% (+2bps) and while 10y10y was less firm, it still rose back to 2.75% (+1bps). With France on holiday for Ascension Day, FRF swaps rose by 2-3bps beyond the very front end.

Swap clips today included EUR 10y at 2.426%, 2.43% and 2.4325%. EUR 12y traded at 2.4775%, 15y at 2.53% and 20y at 2.59%. French inflation trades included FRF 1y at a low-looking 2.975% in €50m, and FRF 6y at 2.83%. FRF 2y June traded at 2.855% and 2.84%.   

Barclays: Upside risks to core inflation  

Eurozone inflation is slowing but only at a “snail’s pace” according to economists at Barclays this week, who see core staying above 5% until September 2023, with “upside risks for Q4 2023 and 2024”.

Near term the bank sees euro HICPx inflation falling to 6.12% (122.82) in May and 5.47% (123.09) in June. In contrast, core inflation is forecast to dip briefly to 5.27% in May before swiftly bouncing back to 5.50% in June:   

“Core inflation will likely fall to 5.3% y/y in May driven by further easing in non-energy goods inflation and one-off effects on the services side, ie, the introduction of a discounted travel card in Germany. Between June and August, we see core inflation fluctuating in a 5.4-5.6% y/y range driven by seasonal strength in discretionary services inflation amplified by basket weight effects. We expect core inflation to ease to 4.3% y/y by September and 3.2% y/y by December driven by decelerating inflation momentum, as well as adverse basket weight and base effects.”

In turn, the forecast profile for core inflation helps to drive the headline rate. However, there are offsetting factors:

“At the headline level, disinflationary pressure from falling energy and stabilising food prices should more than offset this marginal upgrade of core inflation, pushing our inflation forecast 0.1-0.2pp lower.”

How does that compare to the views of the official forecasters?

“Annual 2023 headline/core inflation forecasts (5.3%/4.9% y/y) remain slightly higher than the March ECB staff projections (5.3%/4.6% y/y) but materially below the latest forecast by the European Commission (5.8%/- y/y). In 2024, we still forecast faster moderation in headline/core inflation (2.4%/2.2% y/y) than the ECB (2.9%/2.5% y/y) and the EC (2.8% y/y/-). We think the pass-through of lower input costs into Euro Area consumer prices will become progressively more evident in H2 2023, while the effects of tight monetary policy should increasingly weigh on GDP growth and inflation from late-2023 and 2024.”

New issues: Big EIB linker via JPM

• EIB sold a €200m inflation-linked bond 0.56% due 5 Jun 2034 at par. Coupon and redemption linked to euro HICPx. Lead is JP Morgan.