EU Inflation expectations
5Y Breakevens
5y5y Forward
Curve Differential: 10y/2y
Insights
CONCEPT
We track market expectations on EU inflation via (1) the 5-year inflation breakevens, which represent the expected average EU inflation over the next 5 years; (2) 5y5y forward, which show the expected average 5-year inflation in 5 years from now and measure the market's faith in the ECB to keep inflation on target; (3) 10y/2y yield curve differential evidencing the spread between long and short-term market yields.
CURRENT READINGS
- Investors currently expect EU inflation to run at 1.87% in the near future (ON TARGET). With 5y5y forwards at 2.27%, markets maintain faith in the ECB ability to keep it under control in the long term.
MARKET IMPLICATIONS
Cartesio triangulates those inflation expectations with the current yield curve differentials in Germany, currently at 43bps - FLATTISH - to assess what's the upcoming environment priced-in by investors: moderate price reflation coupled with rising growth prospects, a positive scenario for stocks.
European breakevens are sourced from the French OATi issuances, which we also used to create a synthetic EU 5y5y Forward. Yield curve differentials are from the German Bund yield curve. While realized inflation confirms what has been the direction of travel so far, inflation expectations offer better insights on how to position our investment portfolios for what's next.