Inflation in Europe slows down, the Italian spread goes down: here’s what’s happening on the markets

Surprisingly, French inflation is slowing down. And, equally surprisingly, the tension on Italian government bonds has eased, those which – according to the economists interviewed by the Financial Times – should suffer the most if the European Central Bank continues to tighten. The data from Paris, which comes after those from Spain and Germany, could allow – at least in theory – the European Central Bank to take a breather and curb interest rate increases, the wings of the hawks are sprouting which, in recent days, have continued to raise the bar. A scenario that the markets see favorably, especially for the effects on the Italian spread. Result: the yield differential drops to 205 basis points while the 10-year yield slips to 4.301%. The unknowns are numerous, but investors are growing the idea that the peak of the price flare-up has been reached.

Prices

While waiting for the Fed’s indications, analysts are breathing with the French numbers: prices are down by 0.1% in December, and inflation slows to 5.9% on the year (it was 6.2% in November) due to the effect of energy. However, the institute warned that inflation should reach 7% at the beginning of 2023, to decrease from March onwards. An element that could support the hypothesis of new increases by the ECB.

Lagarde’s moves

However, Frankfurt is preparing to keep the bar straight. After months of hesitation, Lagarde fully embraced the line pursued by Isabel Schnabel, an influential member of the board of the ECB, together with the number one of the Bundesbank, Joachim Nagel, and with the president of De Nederlandsche Bank, Klaas Knot. In other words, absolute priority in the fight against inflation. Moreover, as pointed out by S&P Global, the contraction in the euro area manufacturing sector slowed in December amid the recovery of supply chains and the easing of inflationary pressures. The manufacturing PMI rose to a three-month high of 47.8 in December from 47.1 in November. Not only. In 2022, on average, around 45.6 million people were employed in Germany. And this, according to the federal statistics office Destatis, is the highest level since German reunification in 1990.

The job market

Specifically, the average annual number of people employed in 2022 increased by 589,000 (+1.3%) on an annual basis. Another element that underlines the liveliness of the labor market and could justify the hawks’ line. In early February, when the ECB Governing Council meets, the clash between the hard and soft lines will be significant.