16/10/15: Euro Area Inflation, via Pictet

An interesting chart highlighting the poor prospects for inflationary expectations in both Euro area and the U.S. via Pictet:

5yr/5yr swaps are basically a measure of market expectation for 5 year average inflation starting from 5 years from today, forward (so years 6-10 from today). This is a common referencing point for the ECB technical view of inflation expectations, and as the above clearly shows, we are heading for testing January 2015 lows.

Here’s Picket analysis (comments and emphasis are mine): “In September, headline inflation in the euro area dipped back into negative territory (-0.1% y-o-y) for the first time in six months.

"This weakness must be put into context though as it is primarily due to the steep slide in energy prices. If volatile components (food and energy) are stripped out, core inflation was steady at +0.9% y-o-y. Furthermore, prices of services, which better reflect domestic conditions, rose.

"Nonetheless, falling commodity prices, coupled with the rise in the euro’s trade-weighted value, caused the inflation outlook to worsen. Long-run inflationary expectations, as measured by the break-even swap rate, have been softening steadily since early July and have now reached their lowest level (1.56%) since February this year.

…In parallel, findings from economic and business surveys (PMIs, European Commission surveys) for the third quarter showed decent resilience despite the worries about the Chinese economy. They point to GDP growth of around 0.4% q-o-q in Q3 and Q4.”

Picket projects growth of 1.5% y/y for 2015, “led by domestic demand” that is expected to “continue to benefit from normalisation of the jobs market, subdued inflation, the gradual revival in consumer confidence and an upturn in lending to the private sector.”

In short, sensible view of inflation - low inflation, per Pictet is helping, not hurting the euro economy.