We think eurozone unemployment would have to fall to about 8% – or possibly lower – to move inflation closer to the ECB’s target. The risk to the ECB’s inflation forecast is therefore to the downside.
At its 3 September press conference, the European Central Bank (ECB) revised down its economic growth and inflation forecasts as expected, reflecting weaker growth in emerging markets and lower oil prices since its June 2015 forecasts.
Ten-year Bund yields completed a secular journey from more than 10% in early 1981 to virtually 0% in early 2015. Having reached rock-bottom levels in late April 2015, yields briefly rose above 1% by mid-June, only to settle back down to 0.75% in July. Volatility, in other words, picked up.
Now that much of the Bund yield curve has broken through zero, can Bund yields go even lower? Our sense is that the technical backdrop means that yields will hold these levels, and may go a little lower.
The European Central Bank is done with major policy surprises for the foreseeable future. There is no substance to recent market talk of ECB tapering in light of improved macro data.
Inflation has consistently undershot the ECB’s official forecasts, which have proven overly optimistic for years.