Why is the German Yield Curve Sharply Steepening?
The German yield curve has experienced an impressive steepening of almost 60bps in just one month! This significant movement can be attributed to several key factors that are driving the shift: Fundamentals and Economic Outlook: One of the primary drivers behind this steepening is the market's reassessment of the potential avoidance of a recession. There's a positive repricing of economic fundamentals, suggesting improved prospects for growth and stability. Additionally, there's growing concern about structural inflation running higher than initially expected. Notably, the German 5-year breakeven rate has surged to 2.63%, reaching its highest level since 2009, which has translated into higher long-term yields. Front-End Yield Curve Repricing: The recent decisions made by the European Central Bank (ECB) have also played a role in the steepening. Firstly, the ECB chose to no longer remunerate the bank's minimum reserve held at the central bank. Additionally, today's surprise decision by the Bundesbank's Executive Board further impacted the market. The decision was to remunerate domestic government deposits held with the Bundesbank at 0%, starting from 1 October 2023. Both of these developments could potentially increase demand for German short-term papers. Source: Bloomberg.
German exports to Kyrgyzstan are up 2000% in the past 3 years
Value of these exports is small, but this is just one of many examples showing how hard it is to police export controls on western goods to Russia. Source: Robin Brooks
The gap in valuation discount between US and European equities has never been wider
Source: TME, Sanford Bernstein
Hungary still has an inflation rate of >20%, highest inflation rate in entire EU.
Inflation is driven by food prices (Food CPI +29% YoY) as Hungary has been hit by a drought and this has caused prices to rise. In addition, there is a shortage on the labor market, low labor productivity & very expansionary macroeconomic policies. Source: Bloomberg, HolgerZ
The housing bubble continues to lose more air in Germany
The housing bubble continues to lose more air in Germany. In June, real estate prices slumped sharply, w/existing homes in particular falling by 2.4% MoM. Even new buildings became somewhat cheaper, namely 0.4%. Source: Bloomberg, HolgerZ
Disinflation is on the way in Germany
Disinflation is on the way in Germany. Wholesale prices dropped 2.9% YoY in June, an acceleration from the 2.6% decline from May & the biggest annual decrease since June 2020. Lower wholesale prices could translate to falling #inflation in Germany. Source: HolgerZ, Bloomberg
German ZEW survey highlights concerns over shaky recovery.
ZEW investor expectations fell to -14.7 in Jul (estimate -10.6) from -8.5 in June a bad omen for econ growth. Source: Bloomberg, HolgerZ
Germany is being hit by a heat wave and another drought.
Economically important waterway Rhine has lower & lower water levels. The depth of the Rhine at the gauge tower at Kaub has sunk to 1.06. Source: HolgerZ, Bloomberg