Some Helpful Swaps Geography

Inflation hysteria in some places hasn’t just faded, it has disappeared almost entirely. The old saying is that shooting stars burn out the fastest. One of the hottest systems was in Europe. The ECB, we were told, had done it. Even though QE hadn’t achieved anything of substance in its first or second year, the third was apparently the charm. It led to rife speculation earlier this year about not just tapering QE but even rate hikes to rival the Fed’s.

Not so much anymore. The problem is, still, inflation. In a lot of ways, the frenzied mainstream assessment about price increases was just that. It took relatively minor improvements in data and market prices and blew them all out of proportion (for largely political reasons rather than rational analysis). At the top of this list of raw hype was inflation expectations.

Since those global stock liquidations in late January/early February, European swaps have soured on the hysteria, not that they were all that impressed to begin with. Derivatives traders were betting then for inflation of merely 1.45% in early 2019 (if that was your basis for it, how can it have been anything other than textbook madness?) As of today, according to Bloomberg, they’re back down at 1.26%.

Sluggish price growth across the euro area looms, challenging Mario Draghi’s plan to curtail monetary stimulus while giving bond bulls a lucky break.

That’s the message from the underbelly of fixed-income markets that suggests the inflation trajectory across the the 19-nation region is not only easing over the next year but for the coming decade too. [emphasis added]

Maybe bond bulls (I despise that term; there’s nothing good about persistently low interest rates) aren’t lucky? What the second paragraph describes is, basically, more of the same no-growth world as we’ve been trying to live with for more than a decade. In Europe, as everywhere else, that’s been trouble no amount of QE or ECB for that matter seems able to cure. It gets worse with time, especially factoring so many false starts like this last one.