BONDS: 10-Year Gilt/Bund Spread Below 200bp, To Levels Not Seen Since Oct

Eurozone January flash HICP inflation came in slightly above consensus at 2.5% Y/Y (2.4% cons and prior) with Italy seemingly behind the surprise (released simultaneously at 1.7% Y/Y vs 1.4% cons). On a monthly basis, Eurozone inflation came in at -0.3% (-0.4% cons; 0.4% prior). However, the data on services in the release should be seen as a rather good sign regarding incoming disinflation.

• On an unrounded basis, HICP was 2.52% Y/Y and -0.28% M/M.
• Core HICP also printed slightly above consensus, at 2.7% Y/Y (2.6% cons but almost rounded to 2.7%; 2.7% prior; unrounded: 2.69% Y/Y, -0.96% M/M).
• Looking at the individual categories:
  • Services inflation decelerated to 3.9% Y/Y (4.0% prior), which appears to be broadly what analysts expected. Sequential services inflation of -0.2% M/M is still stronger than what we'd typically see for a January in a pre-pandemic setting but nevertheless the softest January since 2020 - see chart. On first sight, this should be a good sign re the so-called January reset effect (see our HICP preview for background info), but we will have to await the final data for full details here.
  • Energy accelerated as expected, to 1.8% Y/Y (0.1% prior) on the back of a 2.9% M/M sequential jump.
  • Non-energy industrial goods inflation meanwhile remained at 0.5% Y/Y amid a seasonally driven -2.4% M/M sequential print.
  • Food, alcohol and tobacco inflation decelerated a bit, to 2.3% Y/Y (2.6% prior).
• Looking at the national-level prints, headline HICP inflation accelerated in 10 countries in January vs Dec.
• Updated category weightings will be published alongside the final release on February 24.

• Intraday vol and headline risk picked up over the weekend, as Trump set in place to invoke an emergency in order to install 25% tariffs on Canadian and Mexican imports - effective from 0001ET on Tuesday. This leaves calls with the Canadian and Mexican leaders today (a call with Trudeau already set for Monday "morning") as a final opportunity at which to delay or lessen the impact of trade levies.
• USD/CAD gapped notably higher at the open, tipping the rate to touch a high of 1.4793 and the highest level since 2003. The sharper moves for USD/CAD bring >$800mln of option expiries at C$1.4895 on Wednesday into play but, more notably, it's the ~$3bln set to roll off between C$1.4740-1.4800 that should draw attention. A sizeable proportion of that expiry slate is made up of calls, and could keep prices supported across the week and through the dual US/Canadian jobs reports set for Friday.
• Give the deteriorating trade backdrop and 10% tariff threat also levied against China, growth-proxies and risk sensitive currencies are faring the worst off, as AUD/USD slippage puts the pair at a new cycle low. The $0.6088 print marks a new post-COVID low and isolates $0.6099 as key at the close - that level marks the 76.4% retracement of the rally off 2020 lows.
• Headline risk remains high, with much market focus on calls between the White House and Canada & Mexico. Data releases include the ISM Manufacturing print for January - seen keeping pace with the December reading to broadly mimic the data patterns seen in the MNI Chicago Business Barometer print from Friday. Fed's Musalem and Bostic are the central bank speakers of note.

Source: EMMI/Bloomberg

• EUR001W        2.7870 -0.0140
• EUR001M         2.6440 -0.0160
• EUR003M         2.5620 -0.0270
• EUR006M         2.5360 -0.0540
• EUR012M         2.4360 -0.0830