Long-term eurozone inflation expectations rising

Pushing down real rates - could weigh on euro

Chart of the Day

For much of the second half of last year, US inflation expectations were rising while those in Europe only edged higher. More recently, eurozone 5-year/5-year inflation swaps (i.e. implied inflation for 2026-30) have been increasing. In both regions, they do not seem to be high enough to trouble central banks, but the move has weighed on eurozone real interest rates, which could in turn weigh on the euro (as the last chart shows).

Macro

Lots of US data yesterday - retail sales fell by 3.0% MoM in February, while control group retail sales - which feed into the GDP data for consumption - fell by 3.5%. That was partly because of poor weather and partly because sales were boosted in January by stimulus checks. On a YoY basis, retail sales were still up by 6.3%.

Across the categories, the moves ranged from a 7.5% MoM fall for sporting and hobby good sales to a 3.6% increase for gasoline sales - the latter was due to higher prices.

US industrial production decreased to -4.2% YoY in February. Again, weather effects seemed to be at play.

The other data showed that the US business inventories-to-sales ratio decreased to 1.26 in January - much lower than before covid and a reason why inflation could rise sharply this year.

NAHB homebuilder confidence decreased to 82.0 in March. At that level, it suggests housing starts could decline.

Markets

Some softness again - the S&P 500 edged down and the Russell 2000 fell by 1.7% yesterday. The S&P 500 has still risen by 2.3% in the past week and the Russell 2000 has increased by 3.3%.

The rise in inflation swaps have pushed down real interest rates in the eurozone.

This unpacks the US 5-yr/5-yr into the separate components - the 10-year has been little changed while the 5-year has dropped back, which has pushed the implied 5-yr/5-yr up as shown above.

The above means real 5-yr/5-yr yield differentials have moved in favor of the USD in the past month - to a historically extreme level now.

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