Overnight, August's data showed Eurozone consumer prices rising at their fastest pace in a decade at 3.0% for headline inflation and 1.6% when excluding food and energy costs.
Source: Bank of Singapore, Bloomberg.
The first chart shows headline inflation is well above the European Central Bank’s (ECB) 2% target now as Europe’s economies reopen strongly despite the spread of the delta variant. Similarly, August’s purchasing manager indices (PMIs) are close to all-time highs in the Eurozone as the second chart shows.
The Eurozone’s strong recovery over the summer increases the pressure on the ECB to start tapering its quantitative easing when it meets on September 9.
Source: Bank of Singapore, Bloomberg.
We expect the ECB will agree to begin reducing its Pandemic Emergency Purchase Programme from EUR80 billion a month of bond buying.
Source: Bank of Singapore, Bloomberg.
But we think the ECB will remain dovish and signal it will only gradually taper its quantitative easing further over the next few quarters. The virus outlook remains uncertain, and inflation is being exaggerated by supply chain bottlenecks and higher energy and food costs as the Eurozone reopens. As reopening pressures ease, inflation is set to fall back to the ECB’s 2% target next year.
Thus, we expect the dovish ECB will keep yields very low - to the benefit of surging European equities as the last chart shows - and avoid a taper tantrum in European and global markets.Disclaimer applicable to recommendation
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