POWER: EU Mid-Day Power Summary: France-German Jan Discount Widens

European Budget Commissioner Peter Serafin meets with senior figures from the European Parliament at ~17:00CET (11:00ET, 16:00GMT) amid major disagreements over the next Multiannual Financial Framework (MFF, the EU's long-term budget). There is a risk that, come 12 November, when the EP plenary session starts debate on the proposals, one or more of the four moderate political groups that have backed the two Commissions of President Ursula von der Leyen could vote to pass a resolution rejecting certain sections of the budget. 

• As Euractiv notes, "The proposal foresees a merger of regional and farmer subsidies into EUR865bln centralised national plans – much to the dismay of regions, farmers, farm ministers and EU lawmakers." Common agricultural policy funds and cohesion funds have historically been distributed via regional administrations, rather than central gov't. This proposal has caused particular uproar within the centre-right European People's Party (EPP), the largest single group in the EP and a group that has historically garnered significant backing from rural voters and the farming sector across member states.
• EPP leader Manfred Weber told Politico that a threat to reject the proposal outright is needed “to set the tone at an early stage so that our key demands are heard in constructive talks with the Commission.”
• The centre-left Socialists and Democrats, liberal Renew Europe and environmentalist/regionalist Greens/EFA have long complained about being ignored by the Commission. However, objections from the EPP, the group from which VdL hails, represent a more significant fissure than has previously been seen in MFF talks. 

EU member states have agreed to delay ETS2 - the new carbon market pricing scheme  - by one year to 2028. The ECB had estimated that this scheme would push up 2027 inflation by ~0.3pp in its September macroeconomic projections. As such, the delay should imply a mechanical reduction of the 2027 inflation projection December, compensated almost one-for-one with an increase in the 2028 projection (which will be presented for the first time next month). 

• Following the news, the 2s3s EUR inflation curve has steepened almost 5bps to 1.6bps. However, it’s notable to us that this has solely been driven by the 3-year swap (1.84% vs 1.79% yesterday), with the 2-year swap little changed at 1.83%. This may leave scope for further near-term steepening in 2s3s.
• Recent policymaker signalling suggests the ECB will avoid making monetary policy decisions (i.e. delivering another cut) solely on the basis of an ETS2-implied undershoot in 2027/2028.
• In an interview released yesterday (i.e. before the ETS2 announcement), Bank of Greece Governor Stournaras told MNI that while the 2028 projections will be a “key input” for the ECB, other data and “judgement” will play an important role. He suggested that he would be more concerned if spot inflation rates fall below target (Flash October headline was 2.1% Y/Y, core was 2.4%).
• Other relevant comments over the last few weeks:
  • Kazaks (31 Oct) "The 2028 forecast will be very important to look at, to see where inflation dynamics are going, but I would not overestimate the importance,"...."Uncertainty remains high and is unlikely to disappear, so forecasts will come with a very large margin of error"
  • Kocher (31 Oct): “The 2028 projection is of course a projection that is far out into the future,” ....“So putting too much weight on this projection, on this single data point, I think would not be appropriate.”

• MNI: US MBA: MARKET COMPOSITE -1.9% SA THRU OCT 31 WK