EURi: Data eclipses ECB

Data eclipses ECB

EGBs bull-steepened after the ECB raised rates but left its September decision open. However inflation traders had other things on their minds. “Tomorrow is the big day,” explained one, pointing to the release of preliminary CPI/HICP data from Germany, France and Spain. “Fast money see the forwards as rich but it’s a flow market,” the dealer added, saying that the market was reluctant to fade that richness before the seeing the fixing and getting over month end.

Other dealers agreed that the ECB meeting had “no direct impact” on the inflation side. EUR 1y closed at 2.6325% after testing 2.65% ahead of the decision, while EUR 5y5y hit 2.58% before edging down to 2.5575% (-0.5bps) at the close. French inflation slightly outperformed EUR ahead of Friday's CPI data with FRF 1y up 2bps to 2.4375%    

The ECB’s statement repeated the expectation that inflation will drop further over the remainder of the year but will stay above the central bank’s 2% target for an extended period. “While some measures show signs of easing, underlying inflation remains high overall,” the ECB concluded, before pledging to keep rates at “sufficiently restrictive levels for as long as necessary” to return inflation to 2%.

SDR swap trades included EUR 2y at 2.605% in €110m, what looks like 5y5y at 2.559% in €100m, 10y at 2.5325% few times and 15y at 2.618%. In French inflation,  FRF 3y traded at 2.4875%, 2.4975% and later at 2.488%, while 7y went through at 2.66% in €75m.  

Previewing flash inflation   

With the reset market pricing the next HICPx fixing at around 5.21%, economists at Barclays preview the upcoming euro flash inflation data.

They see euro inflation easing to -0.1% m/m and 5.3% y/y in July (5.27% y/y to 2dp), 0.2pp down from June. However, they also see core HICP rising, temporarily, to 5.7%y/y (0.0% m/m; 5.67% y/y to 2dp), up 0.2pp from June, before falling back on a moderating trend from August. The bank explains:

“We expect the acceleration in services inflation to continue in July (1.6% m/m; 5.9% y/y) driven by price increases in travel, recreation and hospitality services during the peak summer travel season. If confirmed, strong inflation dynamics in discretionary services categories should have a bigger effect on EA core HICP than 12 months ago (Jul-22 core inflation: -0.2% m/m) due to higher basket weights of these categories in EA HICP in 2023.

Separately, other research from Barclays examines developments in HICPx fixing surprises, taking into account both national releases and the flash/final timing. It finds that HICPx upside surprises have “sharply diminished thus far in 2023, while near-term market pricing and economic forecasts have stabilized.”

New issues: SPIRE

• SPIRE sold a €50m inflation-linked repack 1.65% due 15 Apr 2028. Coupon and redemption linked to euro HICPx. Repack unconfirmed. Led by DB.