German bunds slump after May CPI remains unchanged; eyes on ECB’s monetary policy decision

The German bunds slumped during European session Thursday after the country’s consumer price inflation for the month of May, remained unchanged at 0.5 percent m/m, meeting market expectations as well and now investors turn attention to the European Central Bank’s (ECB) monetary policy meeting, scheduled to be held later today for further direction to the debt market.

The German 10-year bond yields, which move inversely to its price, jumped 2-1/2 basis points to 0.50 percent, the yield on 30-year note surged 1-1/2 basis points to 1.18 percent and the yield on short-term 2-year too traded 2-1/2 basis points higher at -0.60 percent by 09:20GMT.

Today the focus shifts from the Fed to the ECB as the Governing Council’s latest policy meeting, in Riga, concludes. According to Chief Economist Peter Praet’s speech last week, the policymakers will have discussed issues related to the future of the QE programme. And the Governing Council is expected to judge that the updated economic forecasts are broadly consistent with an assessment that a sustained adjustment in the path of inflation towards target appears to be underway “to warrant a gradual unwinding of [the ECB’s] net purchases”.  

As far as the ECB’s updated economic forecasts are concerned, the weakening of the dataflow demands a downwards revision to its GDP forecast for this year. But perhaps that will merely be nudged lower by just 0.1ppt to 2.3 percent y/y, thus reversing the upwards revision made in March. And the ECB might still wish to leave its growth forecasts for 2019 and 2020 unchanged at 1.9 percent y/y and 1.7 percent y/y. Moreover, we suspect that the headline inflation forecast for this year and next might be shifted slightly higher, by 0.1ppt to 1.5 percent y/y in both years, Daiwa Capital Markets reported.

That, however, will partly reflect the impact of the higher oil price, for which the assumed average price this year will be pushed up by more than USD5 per barrel to more than USD70 per barrel. However, the ECB might also be tempted to push the forecast for core inflation this year higher too, while leaving the profile for future years unchanged, so that in 2020 it reaches 1.8 percent y/y – close to but below 2 percent y/y, arguably in line with the ECB’s target 

Meanwhile, the German DAX slipped 0.24 percent to 12,860.38 by 09:30GMT, while at 09:00GMT, the FxWirePro's Hourly Euro Strength Index remained slightly bullish at 80.98 (higher than +75 represents bullish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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