Forwards creep up as curve steepens; FRF trades
Further gains for Dutch gas futures (+6% today after +12% yesterday) following strikes in the LNG sector in Australia - and maintenance shutdowns in Norway - failed to provide lasting support for even the front end of inflation today with EUR 1y ending unchanged at 3.035% while 5y was equally steady at 2.665% at the close, after brushing 2.685% in early trading.
Longer forwards were a touch stronger though, helped by the curve steepening, but they also closed off session highs with EUR 5y5y ending at 2.63% (+1bps) and 10y10y at 2.84% (also +1bp). French inflation mildly outperformed across the curve with FRF 5y5y up to 2.98% (+2bps) but unable to test 3%.
An absence of euro linker supply or inflation data this week contributed to the rangy tone. This week's $8bn 30y TIPS auction is not due until Thursday, with USD breakevens today holding at just off the levels tested at the start of last week. Meanwhile nominal EGB curves bull-flattened and linkers pretty much kept up, with core real yields 4-8bp lower and BTPei outperforming.
Inflation swap trades reported to the SDR included what looks like FRF 15y at 2.9675%, 2.9725% and 2.98%, plus FRF 5y5y at around 2.976%. EUR 2y went through at 2.8075% in €130m and 2.7975% in €25m, and EUR 10y10y dealt at 2.841%. EUR 5y traded at 2.6675% and 2.672%.
Core inflation likely to slow: BNPP
German preliminary inflation data are due on August 30 followed by euro flash HICP on August 31. Previewing the data, economists at BNP Paribas expect the numbers to show a “gradual” improvement with euro core falling 5.4% from 5.5%, while headline inflation stays at 5.3% albeit with risks skewed towards a slightly lower figure. The bank writes:
- “August inflation figures should be less volatile compared to July, as seasonal patterns are weaker and fewer contracts renew…
“(Still) we expect the following factors to cloud the picture…The French government has started to unwind its energy ‘tariff shield’ and is increasing regulated electricity bills by 10%. We expected headline inflation in France to be up to 20bps higher as a result, translating into up to 5bps for Eurozone as a whole…We expect food inflation to continue decreasing in August, favoured by a negative base effect…Clothing surprised to the downside in Germany (in July) as sales were more aggressive..In August, we could see the weakness unwind, or it could persist if shops keep prices low to clear summer stocks”
BNPP adds that lower underlying inflation in August (and September – data to be released from September 28) could be consistent with an ECB pause next month and even a terminal rate of 3.75%.