Bond rates in the eurozone dipped on Monday, while long-term inflation forecasts fell below 2%, as recession worries grew after warnings about a probable decrease in Russian gas supply.

On Sunday, French Finance Minister Bruno Le Maire said that the French government was prepared for a complete cutoff of Russian gas supply. 

Germany has advanced to the second level of a three-tiered emergency gas plan, warning of a recession if Russian gas shipments are disrupted.

The five-year, five-year forward inflation swap plummeted to 1.9898 percent, much below the European Central Bank’s objective of 2%, and was at its lowest since March 2.

“The ECB and us, we’re still not seeing tangible signs of second round effects, so I suppose on the inflation side … they’ll be satisfied with (the five-year five-year forward inflation swap) coming down,” said Peter McCallum, rates strategist at Mizuho to Reuters.

Analysts still predict a fairly strong monetary tightening path by the end of the year, but they are more concerned about 2023.

“In a nutshell, faster (monetary) tightening (in 2022) and then a stop next year, if not even a reversal,” said Erik F. Nielsen, Unicredit’s group chief economics advisor to Reuters.

Nielsen predicted that the world economy will enter a recession in 2023, with inflation rates dropping from their heights and likely beginning to decrease swiftly.

“I’ll bet my money on the ECB ending its hikes well before we get to policy rates of 2 percent ,” Nielsen told Reuters.

Money markets continue to price in 145 basis points of ECB rate rises by the end of the year, and 200 basis points by the end of 2023.

Source: Reuters


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