EUROZONE DATA: Year-Ahead Consumer Inflation Expectations Down 0.2ppt to 2.6%
Year-ahead median inflation expectations dropped 0.2ppt to 2.6% in the ECB's January Consumer Expectations Survey, falling slightly further than consensus of 2.7%, after last month's unexpected sticky reading.
- The median 3-year ahead inflation expectation was unchanged at 2.6% (2.5% cons), while the 5-year ahead median dropped 0.1ppt to 2.3%. The uncertainty around these expectations remained unchanged in Jan.
- Yesterday ECB president Lagarde noted that the ECB pays close attention to households' inflation perceptions, and this drop in inflation expectations at the very least adds to the ongoing "good place" rhetoric.
- Expectations for economic growth in the year ahead remained unchanged at -1.1%, as did year-ahead unemployment expectations at 11.0%.
- Comments from the press release: "Consumers continued to expect the future unemployment rate to be slightly higher than the perceived current unemployment rate (10.6%), suggesting a broadly stable labour market outlook. Quarterly data revealed a positive change in labour market sentiment."
- Year-ahead personal income growth expectations increased to 1.2% (1.1% Dec), driven by the highest three income quintiles.
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EGBS: OAT/Bund Targeting 2024 Levels With Budget Uncertainty Soon To Pass
The diffusion of immediate-term French political risks has pushed the OAT/Bund spread down from 70bps at the start of the year to 56.5bps at present. The next downside targets in the spread are ~52bps (April 2024 high), the 50bp figure and ~48bps (the pre-snap legislative election level in June 2024).
- More domestic political stability may see growth/fiscal dynamics play a greater role in OAT performance relative to EGB peers over the next few months. That puts immediate focus on the Eurozone and country-level Q4 flash GDP readings on Friday.
- The 10-year BTP/OAT spread is now +3bps, up from -6.5bps on January 16. France's fiscal balances are expected to be worse than Italy in 2026 (deficit target of 5.0% versus 2.8% for Italy), but the removal of political uncertainty may set the stage for a relatively stronger cyclical rebound, driven by domestic demand.
- Yesterday, PM Lecornu survived two additional censure motions from the far-right RN and far-left LFI parties, related to his use of Article 49.3 to pass the expenditure section of the 2026 state budget (PLF).
- Lecornu will have to use Article 49.3 one more time to finalise adoption of the PLF, likely occurring next week. Expectations are that he will survive the subsequent censure motions, and end months of budget negotiations and uncertainty.
- Looking ahead to H2 2026, budget uncertainty will likely return, alongside speculation ahead of next year's President Elections. For now, OATs are able to look through these more medium-term risks.
SOFR: SFRH8-Z8 Strip Blocked
Latest block trade lodged at 08:45:08 London/03:45:08 NY:
- SFRH8-Z8 strip 2K blocked, looks like a buyer.
ECB: Villeroy: Euro One Element That Will Guide Policy, Light Dovish Impact
Headlines crossing from ECB's Villeroy on the exchange rate (via Bloomberg):
- "*ECB'S VILLEROY: EURO IS ONE ELEMENT THAT WILL GUIDE POLICY"
- "*VILLEROY: ECB CLOSELY MONITORING EURO, EFFECT ON INFLATION"
- "*ECB'S VILLEROY: NO TARGET FOR EURO EXCHANGE RATE"
These comments provide an additional dovish impulse to the Euribor strip - ERZ6 briefly marked a fresh session high of 97.98. EURUSD falls 20 pips on the headlines, now -0.55% on the session at 1.1975.
A reminder that Villeroy is one of the most dovish members of the Governing Council, so not too surprising to see his focus on the exchange rate as a potential downside inflation risk - that's likely limiting the market impact.
