The German 10-year rate rises above zero!

To the question we asked yesterday “Can the optimism be confirmed?”, the equity markets have given a positive answer, especially in the US. However, there is nothing to say that it is definitive. But the event of the day occurred in Europe, where the German 10-year yield returned to positive territory for the first time in nearly three years.

The trigger for this rise, even though the US 10-year remained stable, was the much higher-than-expected level of German inflation in January. It did fall due to the base effect of the consumption tax hike in January 2021, but only from 5.7% to 5.1%, whereas the consensus was 4.7%. Already, this means that inflation in the Eurozone is expected to be 3 tenths higher than expected. The other notable consequence is the rebound of the euro, with the EUR/USD exchange rate rising above 1.1250 as the ECB’s monetary policy “isolationism” is being questioned. Inflation figures from France (3.3% vs. 2.9% expected) reinforced the trend this morning. The weak growth of the euro zone in Q4 2021 (+0.3%) had no consequences, as it was only linked to the German underperformance (-0.7%), confirmed this morning by the 5.5% drop in retail sales in December.

Today, the publication of the PMIs and ISM in the manufacturing sector, which we know have remained solid. The next few days will be more interesting with Eurozone inflation tomorrow, the BoE and ECB meetings on Thursday and the US employment report on Friday.