Risk of deflation as retail sales in the Eurozone plunges.
“Eurostat reports that retail sales volumes in the eurozone slumped a greater-than-expected 1.6% on month in December after rising 0.9% in November. Consensus was for a drop of 0.5%.”
“Price of forward Euro area inflation has declined significantly in past few months as market perception of deflationary ‘tail’ scenarios increased – according to our framework, forward starting inflation 2y3y swaps currently trading almost two standard deviations cheap. (i) 5-year inflation swaps traded at 1.8% at the beginning of 2013, since then they have fallen steadily to the current 1.25%. (ii) We expect Euro area growth to improve on a sequential basis, with growth close to potential by 2017. In addition, we think the ECB is committed to taking additional significant measures – should inflation surprise further on the downside – to prevent inflation undershooting the target on a persistent basis.” (Goldman Sachs)