Slower-than-expected inflation decline in France and Spain rattles bonds

Man shopping for food in Spain (file photo)
Man shopping for food in Spain (file photo) Copyright Paul White/AP
Copyright Paul White/AP
By Piero Cingari
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Inflation rates in France and Spain ease less than expected in February, nudging government bond yields higher as markets anticipate a bumpier road ahead to reach the ECB's 2% target.


February's inflation figures from France and Spain have cast a spotlight on the eurozone's economic landscape, revealing a less-than-anticipated deceleration in consumer prices, signaling to policymakers in Frankfurt that achieving the coveted 2% inflation target might prove more arduous than initially anticipated.

In France, preliminary figures indicate a dip in the annual inflation rate based on the CPI from 3.1% in January to 2.9% in February. However, economists had forecasted a steeper decline to 2.7% annually.

Attributed to a deceleration in food prices (dropping from 5.7% in January to 3.6% in February), manufactured products (down from 0.7% to 0.3%), and services (easing from 3.2% to 3.1%) over the past year, the Institut national de la statistique et des études économiques (INSEE) underscores the role of the 'base effect,' stemming from the sharp price hikes witnessed in February 2023, in tempering annual inflation rates.

Conversely, annual price movements for energy and tobacco saw acceleration, climbing from 1.9% to 4.4% and from 16.8% to 18.7%, respectively.

Month-on-month, the CPI surged by 0.8%, rebounding from January's 0.2% decline and surpassing projections of 0.7%. This uptick was primarily fuelled by elevated costs in services, notably rents and transportation, alongside increases in energy (particularly electricity), manufactured products, and tobacco.

Meanwhile, in Spain, preliminary data reveals a drop in the annual CPI inflation rate from 3.4% in January to 2.8% in February, slightly missing economists' expectations of a 2.7% annual decline. On a monthly basis, the CPI edged up by 0.3% in February, matching market expectations.

The Instituto Nacional de Estadística attributes this trend largely to declining electricity prices, contrasting with the upturn witnessed in February 2023, and the stability in non-alcoholic food and beverage prices, which had surged in the same month of the prior year.

The core rate, excluding volatile items such as food and energy, continued its downward trajectory for the seventh consecutive month, easing to 3.4% in February from 3.6% in January, marking its lowest level since March 2022.

Market reactions: Government bond yields surge further

The inflation rates exceeding expectations released on Thursday triggered upward pressure on sovereign yields across the eurozone. The euro held broadly steady at 1.0840 against the dollar.

The yield on the 10-year OAT approached 3% on Thursday, climbing by 6 basis points and set for its highest close since December 1st, 2023. The OAT-Bund spread held firm at 47 basis points, hovering near its lowest level in nearly a year.

Similarly, yields on shorter-dated maturities saw an uptick, with the two-year France government bond yield reaching 3.06%, marking its highest since late November 2023.

The yield on the 10-year Bonos rose to 3.39%, up by 5 basis points, also on track for its highest close since December 1st, 2023. The Bonos-Bund spread remained steady at 88 basis points, near its lowest levels since February 2022.

Looking ahead, Germany is poised to unveil its preliminary inflation data for February, with economists anticipating a decline from 2.9% year-on-year in January to 2.6%. However, monthly inflation is projected to spike from 0.2% to 0.5%.

Subsequently, on Friday, Eurostat will release broader preliminary inflation rate data for the euro area, with economists predicting a drop from 2.8% to 2.5% in the annual headline inflation rate, and from 3.3% to 2.9% for the annual core inflation rate.

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