Spanish and Italian 5-year government bond yields are now below those of the US.
There is still a real threat of deflation across Europe and some countries are already experiencing deflation, but “Whatever it takes” has had a huge impact on debt markets.
Euro area core inflation fell to +0.8% YoY in March from +1.0% in February. In line with consensus but second lowest reading on record. Euro-area long-term inflation forwards drifting down and price negative real rates until 2018-2019. It looks like there could be downside for the EUR/USD if ECB decides to add more easing.
Consensus view that March is to be the trough of Euro area HICP inflation before it gradually picks up in the remainder of the year.
“In response to uncomfortably low inflation, we expect ECB to deliver more easing, probably starting with 15bp cut to deposit rate to negative 15bp in April. We look at the funding market for small and medium-sized enterprises arguing that the ECB could have a greater impact on growth by intervening directly in SME securitizations.” (Goldman Sachs)
Euro area credit and investment growth remains very subdued. The most pressing problem, finding customers.