巴黎银行-欧洲-宏观策略-通胀预期三步曲-20190725-11页.pdf

| FOCUS25/07/20191We recently closed our EUR inflation flattener in light of the flattening of the curve sinceMarch and our view that the ECB will increasingly stress symmetry in its inflation aim.As pressure on the ECB to loosen policy continues to rise, we expect slightly higher long-end inflation expectations, at least initially. The 5y5y/15y15y HICPxT also steepenedahead of ECB QE in early 2015 and again when the amount of QE was raised toEUR80bn a month.Our preferred trade on the back of an expected announcement of a resumption of ECBQE and the new symmetric inflation target is OATei real yield curve flatteners.MARKET VIEWFOCUS | EUROZONE25 July 2019Inflation expectations – A three-step danceKEY MESSAGESIn our view, this year’s decline in EUR breakeveninflation is not yet becoming structurally entrenched,meaning some bounce is possible should the ECBdeliveraconvincingpackageofmeasuresinSeptember.That said, we find evidence that negative inflation riskpremia is having a drag on investor base-case inflationexpectations, pointing to a high risk of structuralentrenchment if the ECB markedly disappoints.Our three-step framework for tracking entrenchmentrisk supports these conclusions and identifies twoadditional macroeconomic drivers of EUR breakeveninflation: spot core inflation and global growth data.Apart from the prospect of ECB stimulus, we believethis year’s fall in inflation risk premia is being driven bytwo additional key macroeconomic factors:a rising risk of global recession, anddeclining confidence in the Phillips curve.We expect these headwinds are likely to persist overthe coming months, though some improvement ispossible in Q4.For our review of the July ECB meeting please seeECB – On the move (25 July).MARKET ECONOMICS | MACRO QUANT & DERIVATIVESStefan Ubovic, Senior Macro Quantitative Strategist | Agne Stengeryte, Europe Rates Strategist| BNP Paribas London branchA negative shock weighs on investor confidence and triggers an accumulation of downside risk premia. 1. Accumulation of riskIf downside risk premia build/persist long enough, this is bound to weigh on base-case inflation expectations which will start to shift gradually lower, towards levels more consistent with a balanced risk outlook.2. Downward shiftIf low inflation persists for a prolonged period following a downward shift in the base case, the market will eventually start to price out the possibility of inflation surprising to the upside, making the decline structurally entrenched.3. Structural entrenchmentWe view a downward shift in base-case inflation expectations as typically occurring in three key stages:Our analysis suggests EUR inflation expectationsare currently at the second stage of the cycle| FOCUS25/07/20192Base-case inflation expectations are more inert andtypically take longer to move. Conversely, once theyhave moved they are much more difficult to shift back.Modelling changes in inflation expectations. We viewa downward shift in base-case inflation expectations astypically occurring in three key stages.Stage 1 – Accumulation of risk: A negative shockweighsoninvestorconfidenceandtriggersanaccumulation of downside risk premia.Stage 2 – Downward shift: If downside risk premiabuild/persist long enough, they are bound to weigh onbase-case inflation expectations which will start toshift gradually lower, towards levels more consistentwith a balanced risk outlook.Stage 3 – Structural entrenchment: If low inflationpersists for a prolonged period following a decline inbase-case expectations, the market will eventuallystart to price out the possibility that inflation maysurprise to the upside, making low expectationsstructurally entrenched.Inflation options as a gauge of the expectations cycle.A measure of this three-stage cycle can be derived fromthe inflation options market, by comparing the impliedvolatility for options with varying strike prices.If we shift the option strike in set increments and comparehow quickly the options premium and implied volatilitychange with the move, we can derive a proxy for therelative probabilities that the options market attaches todifferent inflation outcomes.The mode of this derived distribution – ie, the most likelyoutcome – can then be thought of as the base-caseexpectation, while the skew – ie, the relative size of thetails – can be thought of as inflation risk premia.Our analysis includes the usual caveats in that theinflation options market is not particularly liquid and themethodology used assumes the market is risk-neutral.Nonetheless, we think the results still provide importantinsights. Figure 2 illustrates our conceptual frameworkwhile the main findings are discussed overleaf.This year’s decline in EUR inflation breakevens isconcerning, in our view, as it points to a markedfall in investor confidence in the inflation outlook.In the July ECB press conference, Mario Draghiacknowledged that the fall in market-based inflationexpectations is worrying and it would be a mistake fo...