Market News

Euro zone inflation expectations hit highest level in years - REUTERS

OCTOBER 22, 2021

By Saikat Chatterjee, Abhinav Ramnarayan

LONDON (Reuters) -Euro zone inflation expectations among bond investors hit their highest levels in years on Friday, putting additional pressure on the European Central Bank and its insistence on maintaining crisis-era stimulus.

Shortages of workers, fuel, cargo ships, semiconductors and building materials as the global economy bounces back after pandemic lockdowns have companies from electric car makers to chocolatiers scrambling to keep a lid on costs.

Some of the world’s biggest brands are now passing on higher prices to consumers and are warning any policymakers sitting on the inflationary fence that things are going to get worse.

The German 10-year breakeven inflation rate, which represents the difference in yield between a nominal bond and its inflation-indexed counterpart, rose to around 1.81%, the highest since April 2013.

A similar gauge in the United States held at its highest level since August 2006 at 2.64%.

“What’s noticeable as well is that these higher inflation expectations aren’t simply concentrated for the next few years of the time horizon, since the 5y5y inflation swaps that look at expectations for the five-year period starting in five years’ time have also seen substantial increases,” said Deutsche Bank chief strategist Jim Reid.

He was referring to the five-year, five-year forward inflation swap, a key market gauge of long-term euro zone inflation expectations, which was at its highest since September 2014 at 1.9489% on Friday.

Global supply chain problems as the world economy reopens from COVID-19 lockdowns and labour shortages have fuelled price pressures. But unlike some other major central banks like the U.S. Federal Reserve and the Bank of England, policymakers in the single currency bloc are yet to clearly signal they would unwind pandemic-era stimulus.

Rising inflation expectations also pulled nominal bond yields higher, with Italy’s 10-year government bond yield hitting its highest level in five months at 0.973%.

Later on Friday, Markit’s initial purchasing managers’ index (PMI) for the euro zone services and manufacturing sectors are due to be released at 0800 GMT, a key business survey that indicates the health of the economy.

A Reuters poll showed that expectations are for a composite reading of 55.2, where 50 is the level that separates contraction from expansion.

Reporting by Saikat Chatterjee and Abhinav Ramnarayan; Editing by Emelia Sithole-Matarise


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