We track where the market thinks EU inflation is heading using three key gauges: (1) The 5-year inflation breakevens - the market’s bet on average EU inflation over the next 5 years; (2) The 5y5y forward - what the market expects 5-year inflation to look like 5 years from now, showing the market’s long-term faith in the ECB; (3) The 10y/2y yield curve differential - the gap between long and short-term bond yields, showing how the market views economic growth.
CURRENT READINGS
Investors currently expect EU inflation to run at 1.48% in the near future (VERY LOW). With 5y5y forwards at 2.04%, markets maintain faith in the ECB's ability to keep prices under control long term.
MARKET IMPLICATIONS
Cartesio layers these inflation expectations over the German Bund yield curve (our proxy for the EU). With the 10y/2y spread sitting at 36bps (FLATTISH), investors do see healthy disinflation that should support the economy and benefit both stocks and bonds.
Realized inflation tells us where we’ve been, but these forward-looking expectations tell us where to position your portfolio next.
European breakevens are sourced from French OATi issuances, which we also used to create a synthetic EU 5y5y Forward. Yield curve differentials are from the German Bund yield curve.