|FOCUS04/04/20191Reiterate:5y5y/15y15yHICPxTflattener.Entry:53bp.Target:35bp.Stop:65bp.Carry:flat.Current:53bp.Close:LongOATei-22IOTA.P&L:+6bp.TRADEIDEAFOCUS|EUROZONE5April2019EURinflation:SwingincarrysupportsBEIflattenersKEYMESSAGESThelatesteurozoneinflationdatawasabitalarming,withpartofthesoftnessseeminglydrivenbycomponentsthataretypicallynotsensitivetothetimingofEaster.Thedataislikelytoremaindistortedinthemonthsahead.Coreinflationisexpectedtoreverttowardsitsunderlyingtrendlaterinthesummer.Butifitdoesn’t,wewouldexpectmarketstoworrymoreabouttheECB’sabilitytogetinflationbacktotarget.Ineithercase,theEURinflationbreakevencurveislikelytoflatten.Currently,largepositiveinflationbreakevencarrypresentsanopportunitytoenterflattenersnear(orat)thesteepestlevelsonaforwardbasis.Retreatininflationdata-isEasteralonetoblame?Eurozoneheadlineandcoreinflationcameinat1.41%and0.78%y/y,respectivelyinMarch,downfrom1.5%and1.0%inFebruary.WhiletheEastereffectwaslikelytoblameforasignificantamountoftheslowdown,theremayalsohavebeensomeunderlyingmoderation,withpartofthesoftnessinsomememberstatesseeminglydrivenbycomponentstypicallynotsensitivetothetimingofEaster.Whiletheformershouldreversesoon,thelatterdevelopmentisalarminggivenalreadystubbornlylowcoreinflation.Inflationuncertaintytopersistuntilthesummer…TheEastereffectislikelytocontinuetodistorttheinflationdataoverthecomingmonths,withoureconomistsexpectingcoreinflationtoreverttowardsitsunderlyingtrendonlyinthesummer.Meanwhile,despitetheECBappearingtohavemovedtoaneasingbiasamidtheongoinggrowthslowdown,itmightstillbelimitedoneasingoptionsandlesswillingtoactbeforethenextpresidenttakesofficeand€ster.…addingtomarket’sinflationanxietyandlikelypressuringinflationbreakevenstoflatten:ECBPresidentDraghihasattributedtherecentfallinmarket-basedmeasuresofinflationtoadropininflationriskpremium.Inourview,itismorelikelythatthewideninggapbetweenthemarket-andsurvey-basedmeasuresoffutureinflationisdownduetoinertiainsurveyforecasts.Indeed,theresultsofECB...
