Europe faces soaring prices

Inflation expectations are soaring in Europe. The break-even inflation rate on the 5y5Y (5-year inflation in 5 years) has reached US levels in the euro area. Twelve months ago, it was at half that level.

In addition to energy prices, metals and agricultural commodity prices are soaring, and above all, there is every reason to believe that the ECB will be bound hand and foot to this slippage, as growth will weaken significantly, with even a risk of recession in some countries like Germany. The Bundesbank has pointed out that it is possible that GDP will contract again in the first quarter, despite the rebound in industrial activity in January (+2.7%m/m). But the consequences of the war in Ukraine are likely to be felt more in the 2nd and 3rd quarter, mainly due to shortages in industry.

Losses were limited compared to yesterday’s opening on European equity markets as Europe (led by Germany) is resisting the idea of a total embargo on Russian oil for now. But the Eurostoxx 50 is now in a bear market, i.e. it is down more than 20% from its November 2021 highs. The EUR/USD exchange rate has stabilised around 1.0850 pending ECB and US inflation figures on Thursday which could send a further downward signal. On the other hand, the decline of the equity markets was very strong in the US (around -3%) and the trend remains negative.