US: MNI POLITICAL RISK - Tensions High Ahead Of Talks With Iran

• We would caution reading too much into the German CPI print as there appear to be some strange seasonals in December last year.
• Of the five prior December M/M prints since 2020 was have seen -0.4%M/M in 2022, +0.5% in 2024, +0.1% in both 2020 and 2023 and +0.2% in 2021.
• The print this year was flat M/M (0.0%M/M) and therefore a little softer than those seen in most prior years, but notably softer than in 2024.
• Looking at a 2-month change, Nov24-Jan25 was 0.3%, Nov23-Jan24 was 0.3% and Nov22-Jan23 was 0.5% (before that CPI was more substantially above target).
• If we were to see a 0.3% increase between Nov25 and Jan26 that would imply a January M/M reading of 0.3% and return national CPI to 2.3%Y/Y (the same level as in November).

• After 0.3pp downside vs headline consensus in German flash CPI was last seen in January 2025, looking at the historical CPI data highlights some notable base effects present last December.
• In all other recent years, the seasonality from Nov to Dec has been a marginal increase, flat or decrease in the index level. This was the case in 2024, and tentatively points towards today's CPI drop in the Y/Y measure being temporary.
• As we've projected following state-level data, core slowed materially, by 0.3pp to 2.4%, the lowest Y/Y reading since June 2021.
• That appears to have been driven by core goods, as services remained unchanged at 3.5% Y/Y in December. Analysts saw mixed developments on core goods ahead of the state-level data but the magnitude of the deceleration was most likely unexpected, and a key contributor to the overall headline downward surprise.
• Energy meanwhile also contributed downwardly to the change since November, coming in at -1.3% Y/Y (-0.1% Nov), the lowest since August.
• Food was also lower than previously, at 0.8% Y/Y (1.3% Nov).

Bund and Euribor futures firm on the back of the German national CPI data, which was a touch softer than regional level data implied.

• ERZ6 through prior session highs, to test the December 8 high (the day whereby the market took comments from ECB’s Schnabel to be hawkish and priced more meaningful odds that the next move from the Bank would be a rate hike, not a cut). ECB-dated OIS last pricing near 20% odds of a rate cut come the end of the July meeting.
• Bunds to fresh session highs at 127.75, piercing the 20-day EMA (127.73). A clean break above would expose the Dec 30 high (127.86).
• German yields now ~2.5bp lower across the curve.