The ECB’s Mario Draghi said recently that there’s a “clear path” to his next pivot in monetary policy. Put simply, if you’re looking for the ECB to taper and tighten, you better be looking for inflation to accelerate towards his “target.”
That's precisely the opposite of what's happening.
European inflation is, in fact, moving away from his 2% inflation target. The European Bond market is nailing it and Germany in particular is worth examining.
What's Up with Germany
Earlier this week German inflation data came in weaker than expected.
- Headline CPI decelerated to 1.4% year-over-year in February from 1.6% in JAN; trending lower
- EU Harmonized Headline CPI decelerated to 1.2% YoY in FEB from 1.4% in JAN; trending lower
Inflation falling? German Bunds get that. The German 10-year yield falls to +0.58% which is DOWN -17 bps in the last month alone. The German DAX si down -10% from it's January peak. We're still bearish on the DAX.
Why #EuropeSlowing Matters
What's happening in Germany looks a lot like what's happening in Europe more broadly. Consensus was seemingly most bulled up on European equities, the Euro currency, and the Eurozone economy heading into 2018 (i.e. at the wrong time). Eurozone Headline CPI decelerated recently to +1.2% year-over-over-year (-10bps sequentially) and is trending lower. The December print was +1.4% Y/Y, and the November print was +1.5% Y/Y.
With E.U. GDP more than 20% of global aggregate economic growth, #EuropeSlowing will have significant knock-on effects. In other words, it's been a great run for global economic growth. However, after a multi-quarter "synchronized global recovery," we think this increasingly consensus narrative is played out.