Bull-flattening and French supply
The combination of the bearish ECB meeting and French auctions made for a busy day in inflation according to traders today. HICPx gained through the morning with the duration sell off and the auction bonds were bid, dealers said, “especially the 30y line”.
The front of the inflation curve turned in a “good performance” helped by commodities and also the hawkish ECB, after the latter bear-flattened nominals and sparked losses of 12-15 ticks in red EURIBORs.
Dealers reckoned that core inflation was set to remain “sticky” due to increasing wage pressure and the ECB’s widely-expected 25bps rate hike failed to damp down the rally at the short end of the inflation curve. EUR 2s/10s bull-flattened by around 2.5bps with EUR swaps 6-8bps stronger up to 5y.
The AFT sold the full €1.5bn in linkers with the €669m OATei29 covered 3.14x, the €600m OATei-31 2.45x and the OATei-53 3.12x. The bonds cleared at an average real yield of 0.52%, 0.46% and 0.62%, respectively.
In addition to the ECB-driven nominal selloff, the rise at the front end of the inflation curve came against a backdrop of gains for Brent (+$1.7) and gas futures (+7% at €41). The latter briefly spiked to near €50 (+30%) after headlines suggesting that the Groningen gas field will be closed from October 2023.
Further out the curve swaps rose by 1-3bps to leave EUR 5y5y at 2.49% (+2bps) and 10y10y at 2.77% (+1bp). Swap trades on the SDR included plenty of EUR 5y at 2.4825%, 2.4925% and last at 2.51%. EUR 15y went through at 2.57625% and 30y traded a few times, last at 2.704%.
ECB inflation forecasts
The ECB's statement today repeated that inflation is set to remain "too high for too long”. New forecasts show that headline inflation is expected to average 5.4% in 2023, 3.0% in 2024 and 2.2% in 2025. They continue:
- “Indicators of underlying price pressures remain strong, although some show tentative signs of softening. Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labour market for the speed of disinflation. They now see it reaching 5.1% in 2023, before it declines to 3.0% in 2024 and 2.3% in 2025.
Given the importance of supply shocks for the rise in inflation since 2020, what do the ECB staff forecasts assume for energy prices? With TZT gas futures around €41 at the time of writing, having averaged €45 over the year to date, the ECB assumes that the gas price rises from €42 per MWh in 2023 to €52 in 204 and then falls to €46 in 2025. Similarly, wholesale electricity is projected to rise from €122 in 2023 to €152 in 2024 before falling back to €123 in 2025. In contrast the oil price is assumed to fall steadily from $78.0 in 2023 to $70.4 in 2025.
New issues: Credit Agricole
- Credit Agricole sold a €50m inflation-linked Green EMTN 1.565% due 30 Jun 2033. Coupon and redemption are linked to euro HICPx. Self-led.