EUROPEAN INFLATION: Nuanced Developments in German CPI in January [2/2]
- Insurance services (part of "other goods and services", ECB president Lagarde mentioned recently that the category is under elevated scrutiny in January as annual contracts are often set at the beginning of the year) sharply decelerated, but remain elevated, at 9.9% Y/Y vs 16.6% prior, which took away 0.13pp in contribution to headline. "Social facilities" contributing 0.07pp more than before partly made up for that in the "other" category.
- The transport category (which is mixed in weighting across services/goods) stands out with a 0.21pp higher contribution to headline - out of that, 0.09pp came from "passenger and goods transportation" (thereof 0.04pp "Combined passenger transportation services", which went to 11.6% Y/Y from 3.4% in Dec; 0.02pp from rail transport, 0.03pp from international flights), and 0.11pp from fuels.
- Note that German CPI did not see a weightings update in January (as expected).
MNI’s inflation breadth tracker (see chart below) shows disinflation rebooting in the low-inflation categories in January, with the percentage of ECOICOP (European classification of individual consumption according to purpose, a standardized category split) items printing at or below 2% up to 50.7% from 48.3% in December. In the high-inflation categories, disinflation progressed also, with the percentage of categories above 6% falling to 9.3% from December's 12.2%.
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EGBS: French Political Developments In Focus Ahead Of PM Adress
French political developments ahead of PM Bayrou’s general policy address at 1400GMT/1500CET have dominated EGB-specific news flow this morning. Although Socialist leader Faure suggested an agreement with his party and the ruling government was possible this morning, the PM has since pushed back on changes to Macron’s pension reform law.
- That helps the 10-year OAT/Bund spread widen back above ~83bps, up from an intraday low of 82bps earlier. The spread remains 1bp tighter today though.
- Bund futures have moved further away from session highs, now -14 ticks at 130.68. Alongside the aforementioned French developments, a bid in European equities and supply-related pressure has weighed on major EGB futures.
- 10-year peripheral spreads to Bunds have tightened on the equity rally. The BTP/ Bund spread is 2bps tighter at 118.5bps, down from yesterday’s intraday high of almost 124bps. Italian November industrial production was stronger-than-expected at 0.3% M/M (vs 0.1% cons), but the underlying trend remains weak.
- The spread has been set for today’s 10-year GGB and 3/30-year EU-bond syndications. The EU syndication will have a joint size of E11bln, in line with MNI’s expectations. E5bln of the new 2.40% Apr-30 Bobl was also issued this morning.
- ECB’s Holzmann continued to express a preference for a cautious easing cycle, given persistent core inflation pressures.
- The US calendar is headlined by PPI at 1330GMT.
GILTS: Fade From Early Highs, Little Changed Ahead Of Reeves' Appearance
The early bid in gilts fades alongside a similar move in wider global FI.
- Pressure around EU/EGB syndications, a move off lows in oil and continued questions surrounding medium-term French political and fiscal risks initially pushed bonds away from session highs. Oil has pulled back since.
- Gilt futures last flat at 89.30 vs. highs of 89.72.
- Bearish technicals intact, initial support & resistance located at 88.96/90.31.
- Yields little changed to 1.5bp lower on the day, curve steeper.
- 10s spread to Bunds 1.5bp tighter around 225bp.
- Decent demand at the latest 30-Year I/L auction did little to counter the pullback, although the DMO will have welcomed such results given the weakness in bonds seen in recent weeks alongside questions surrounding the UK’s fiscal health. Yield levels on offer will have aided takedown.
- BoE-dated OIS prices 42bp of cuts through ’25 vs. 44bp early today. Hawkish cycle extremes situated at 39bp.
- SONIA futures -1.5 to +1.0.
- Chancellor Reeves will appear in the Commons later today (around 12:30 London), with MPs set to question her on the UK’s fiscal outlook after the recent increase in market-based fiscal risk premia.
- Beyond that, tomorrow will see the latest round of CPI data (expect our full preview later today), comments from BoE dovish dissenter Taylor and an auction of the GBP4.00bln of the 10-year 4.25% Jul-34 gilt.
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