EURi: Steepening helps forwards to fresh highs; Foodies

Steepening helps forwards to fresh highs

Tumbling oil and gas prices may have weighed on the front end of the euro inflation curve but the steepening helped the long forwards to make fresh cycle highs today. EUR 5y5y finished at 2.555% (+2.25bps) while 10y10y rose to 2.85% (+1bps) as nominal duration sold off and core real yields bear-flattened, backing up by  2-10bps led by the front end.

EUR 1y swaps fell to 2.96% (-6bps) while 5y fell to 2.51% (-2bps) as Brent fell through $75.5 to lose almost $3, while natural gas futures fell by 8% after losing more than 4.5% yesterday.

Real yield flattening helped the new 15y BTPei-39 richen to around +24bps over the BTPei-33, from +27bps at launch on Tuesday, while in outright terms the new bond ended around 2.41% from 2.439% at launch. Banks took 26.1% (€1.04bn) of the new issue according to the Treasury, fund managers accounted for 24.8% (€992m), pension funds and insurers 41.5% (€1.66bn) and hedge funds 7.6% (€304m).   

SDR swap trades included EUR 1y Aug 22 Aug 23 at 6.181% and 6.1725%, both in €300m. EUR 10y went through at 2.535%, 20y at 2.6925% and 30y at 2.777%.   

Inflationistas become  foodies as HICP data approach

In contrast to this week’s shocking UK CPI print, economists at BNP Paribas expect the upcoming euro HICP data (for May) to show a further “tentative” easing in Eurozone inflationary pressure.

Driven by disinflation in energy, BNPP expects headline inflation to decline to 6.2% in May, which would mark the lowest inflation rate since February 2022. It also expects core inflation to continue to decline to 5.4%, but then remain above 5% until August, given strong services inflation.  

The bank previews the numbers:

“May inflation figures could be noisier than usual, particularly in services and food…(and) particularly in Germany

 

“One-off changes: The introduction of a monthly 49-euro ticket offering travel in most public transport in Germany is likely to dampen services inflation in the eurozone’s largest economy, and knock off up to 10bp from the overall eurozone services print.

 

“Seasonality: Offsetting the effect of the travel ticket, we expect package holidays to grow by 5% on the month in Germany in line with their historical pattern, pushing up services inflation artificially due to the much higher weight package holidays represent in the 2023 HICP basket compared to 2022. This is likely to remain a German story, however, as we expect package holiday prices to remain broadly flat in the eurozone as a whole, in line with their historical seasonality.”

 

“Erratic food prices: We expect food inflation to continue decreasing in May, albeit more slowly than in April as the latest print was skewed by a 3% m/m fall in the price of vegetables…We expect food inflation to continue cooling from May onwards, decreasing from 15% in April to 14.2% in May.

As well as being "erratic", BNPP thinks food prices could also prove sticky:

"We expect food inflation to remain above 8% at the end of the year – and we are cautious about predicting an outright fall in the level of food prices, for two reasons: Though the price of food commodities continues to fall, we believe aggregate indices such as the FAO Food Price Index only partially reflect European consumption patterns…Falling prices for some products, such as bread and cereals, have been largely offset by a surge in others, such as fruit and vegetables.

 

“We think there are latent cost pressures along the food supply chain that are likely to be passed on to consumers eventually. And, to the extent that food importers and producers lock-in longer term wholesale contracts, we expect them to benefit from cheapening commodities only slowly.”

Bloomberg median forecasts for the national HICP prints are 0.3%/3.4% for Spain (versus 3.8% last month), 0.3%/6.5% for France (versus 6.9%), 0.2%/7.7% for Italy (versus 8.7%) and 0.3%/6.9% (versus 7.6%) for Germany.

These national data will start to be released from May 30 with eurozone flash HICP due on June 1 and expected to come in at 0.3%/6.4% (versus 7.0%) for headline and 5.5% (versus 5.6%) for core.  The reset market is trading May23 HICPx at 6.1725%.