Higher Inflation in Eurozone Is Very Underappreciated Risk

Higher Inflation in Eurozone Is Very Underappreciated Risk by Peter Boockvar – Financial Sense

Yesterday’s 1.7% rise in the CRB index matched the 2nd biggest in about a year. The highest level in 9 months is being met by mostly yawns in conventional yields. Looking specifically at the epicenter of the biggest bubble, that being the European bond market, there is an uptick in inflation expectations as the German 10-year inflation breakeven is up 3 bps to 1.24% and that is the most in 8 months. The French 10 yr breakeven is up by 2 bps and the UK 10 yr inflation breakeven is higher by 2.5 bps. Just read again the rising inflation commentary in the Markit press release on eurozone services and manufacturing and combine with this the rise in commodity prices and I have to believe that higher inflation is one of the most underappreciated risks in the European bond market.Putting aside sovereign yields for a second, if you didn’t see last week the yield to worst on the ICE Bank of America Merrill Lynch euro high yield index fell to 2%. Repeat that back a few times, this European junk bond yield index is yielding 2%. The US 5 yr Treasury yield is yielding 2%. The US 5 yr inflation breakeven closed at a 5 month high yesterday but is highly correlated too to the CRB index.

German 10 Year Inflation Breakeven
German breakeven 10-year

Another anecdotal commentary on inflation out of Europe, Markit reported its German construction figure for October which was little changed at 53.3 but they said “intense supply chain constraints contribute to a sharp rise in input costs…The incidence of delivery delays was one of the greatest seen for over a decade, while purchase price inflation was pushed to a 6 ½ year high.” Also, the demand for labor is getting heated as the “rate of job creation was among the fastest seen since data collection began in late 1999.” The German 10 yr bund yield sits there at just .34%.

Here is another from Markit on retail sales in the eurozone where its index fell 1.2 pts in October: “Gross margins facing eurozone retailers continued to be squeezed at the start of the fourth quarter. The rate of decline remained marked despite easing marginally from September…Contributing to falling margins was another rise in average input prices. Moreover, the rate of inflation quickened to a 57 month high and remained substantially greater than the long-run series average.”

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