EURi: Good performance follows strong French auction

AFT France Tresor Jan 2023
A good performance by inflation was assisted by a strong launch of the new OATei-34 according to dealers today.

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  • Good performance follows strong auction

  • Headline versus core inflation: Barclays

  • New issues: SPIRE, Citigroup


Good performance follows strong auction

A strong €2.25bn auction of the new OATei-34 helped the whole inflation market to gain today, according to traders. The sale was covered 2.16 at 0.65% and dealers said that decent overbidding at the auction was still followed by the bond performing well on the follow. “€2bn of supply and breakevens are 4bps higher – that’s pretty strong,” suggested one trader.


At the same time, a UST-led duration selloff encouraged real yield buyers and, while oil prices fell by 50 cents today, wheat prices had been supported by Russian and Ukrainian threats to shipping and ports. Dutch gas futures rose by almost 7%.


EUR swaps finished 3bps to 6bps stronger and near to the day’s highs led by the front end, with 1y testing 2.50% (+6bps) and 5y5y at 2.53% (+3bps). French inflation almost kept up with euro and FRF swaps rose by 1bp to 5bps.


Core real yields finished 0-2bps lower while the long end of the BTPei curve saw a similar 1-2bps rally ahead of the Treasury's auction announcement (the Treasury later confirmed plans to sell €1-1.25bn in BTPei-33 on Jul 25). 


SDR swap flows included EUR 10s/20s at 16.5bps, 9y at 2.45375%, 5y at 2.4169%, 5y5y at 2.5215% and 20y at 2.625%. In French inflation, FRF 5y went through at 2.49% in €50m, 2.51% in €150m and 2.495% in €50m. FRF 10y traded at 2.67% and 2.675% in €25m, and EUR/FRF 3y dealt at 4bps (FRF under) in €150m and €100m.      


Headline versus core inflation: Barclays

Economists at Barclays updated their inflation forecasts today and while they see euro HICPx slowing again to 5.23% (index 122.94) in July from 5.49% in June, core inflation is likely to edge up to 5.67% in July according to the bank, before beginning to fall again in August.


Barclays then sees HICPx inflation falling to 2.99% by end-year, although the 2023 low of 2.18% is expected in November. Core inflation is projected to end the year at around 3.36%. Barclays continues: 


    “We acknowledge the downside risk to our core inflation forecast if seasonal services prices continue to surprise to the downside. However, we think the evidence from Euro Area June HICP is not yet sufficient to call a turning point in Euro Area services inflation.


    “Services will likely remain a key source of sticky inflation, with rising labour costs mitigating the disinflationary pressure from lower energy prices, while a tight Euro Area labour market should support consumer demand and workers’ bargaining power. We still expect a seasonal acceleration in services inflation from 5.4% y/y in June to 5.9% y/y in August, followed by gradual stabilisation.


    “Food and energy prices could be a source of near-term inflation volatility. While not our baseline, the long expected food disinflation driven by lower input costs could be delayed by rising agricultural commodity prices driven by wheat supply risks in the Black Sea Region.


    “Gas and electricity disinflation is affected by country-level decisions related to energy support unwinding, as well as structural market reforms. In particular, the termination of gas regulated tariffs in France should push energy consumer prices lower in July as households transition to cheaper market rates. But, France has announced a 10% increase in regulated electricity tariffs in August, which will likely more than offset the July dip.”


New issues: SPIRE, Citigroup

  • SPIRE last week sold a €100m inflation-linked repack 1.13% due 15 Apr 2032. The EMTN is linked to euro HICPx and is backed by an unspecified repack. Lead is JPM.


  • Citigroup last week sold a €19.6m inflation-linked EMTN due 20 Jul 2032. The note pays 5% to 2024 then pays euro HICPx inflation floored at 0%. Self-led.