EUR/USD flows: Bunds sit around range highs after more downside CPI surprises

German unemployment comes in better than expected at -12k vs mkt +10k with the rate down to 6.3% from 6.4%. State CPI thus far also notably on the low side (BW at -0.3% and 2.4 from 2.6%, NRW -0.2% and 2.4% from 2.7%). Italy unemployment also lower than expected at 5.1% vs mkt 5.3%.

Bunds tick up 10-20 ticks on the lower inflation prints, with the CPI data so far this morning tending to come in on the low side of expectations, offering some relief. Left around the range highs for recent weeks – as elsewhere waiting on Iran conclusions.

Meanwhile, there is an interesting ECB Blog here discussing the ‘scarring effect’ of geopolitical risk on consumer expectations. In a nutshell it argues: conflicts have a marked impact on inflation expectations, that are extrapolated from short-term to medium term, and with a bias to overreactions. Second, memories of past conflict influence current thinking – amplifying attentiveness to inflation and fears of adverse financial situation impact. That then can amplify short-term macro impact.

As such, ‘These two scars may reinforce each other and are likely to shape consumer expectations and behaviour in the coming months, as conflicts and heightened macroeconomic uncertainty persist.’.

Finally, the blog notes the importance of trust and central bank reputation. When the central bank is perceived as credible and trustworthy, households are more likely to view deviations of inflation from target as temporary. And they are more likely to expect monetary policy to successfully stabilise inflation. The overall conclusion is “the evidence suggests that trust in the ECB acts as a buffer against the de-anchoring of inflation expectations – maintaining credibility and effective communication therefore remain essential, especially in volatile macroeconomic and geopolitical environments”.

You could argue then that this ‘talks the ECB book’ when it comes to the merits of hawkish talk or ‘pre-emptive tightening’ as a way of reinforcing credibility, trust in lack of second round impacts, and so ultimately the ability to keep policy on average easier over the medium-term.