And here's a nice reminder courtesy of @SoberLook.com of the markets' view of 5-year-to-10-year forward inflation expectations for the euro area:
Note: 5y/5y inflation swap basically measures expected inflation for the period of between 5 years from now and 10 years from now (5 years over 5 years from now). Here is a note on its importance to ECB policy http://www.itcmarkets.com/news-press/itc-egbs-questions-regarding-draghis-reference-to-5y5y-forward-rate-and-inflation.
Needless to say, at ECB inflation target of 2% over the next 1-2 years, we should be expecting 5y/5y to be above 2% mark, not below it. And if previous (2004-2007 period) should be our guide for growth, we should be looking at 5y/5y swap rate at around 2.4%.
Which means the 'flashing red' indicator for ECB is now smoking.
Are those yields accounting for QE just as some commentators state stock prices in Europe already reflect QE as a reality.?
ReplyDeleteAnd what if there is no QE or a dumbed down version of it, does the graph continue heading south?
Sorry, not clear. By "smoking" do you mean "predicting deflation"?
ReplyDeleteNot exactly 'predicting deflation' - 5y/5y swap in my opinion is predictor of 2 things: 1) sustained very low inflation over medium term horizon, and 2) ambiguous recovery during the upside cycle. So whether we will see deflation over any prolonged period of time or not is not something that 5y/5y describes.
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