Although inflation continues to rage across Europe, we are seeing a decline in inflation expectations, with the key market indicator of long-term inflation expectations in the region falling back below 2% – the first time since March.
For me, this is a read that the market is not entirely focused on the inflation basket at the moment and there are other moving parts to pay attention to. On the one hand, it may be a sign that central bank tightening expectations are slowly being tempered. This is evident in bond yields, with German 10-year Bund yields also falling from 1.90% to 1.28% in recent weeks.
In the case of Europe, recession risks are on the rise as the gas crisis threatens to escalate once the summer is over.
I’m not going to read this as a sign that inflationary pressures will subside significantly, but it is a suggestion that we could have seen at least a spike in bond yields – something worth noting according to the USD/ JPY earlier here.