Downside Reversal Continued On Eurozone Inflation Surprises

Bund gains made during and after Thursday's dovish ECB outcome have been all but erased in the European morning session amid higher-than-expected inflation readings.

• October German State Inflation has mostly come in above the expected national figure, but the real shock was in Italian flash HICP which came in 4.0% M/M vs 1.4% expected, 1.7% prior.
• Combined with some hawkish ECB member commentary casting doubt on the prevailing dovish market narrative of yesterday's meeting, the German short end sold off and BTP spreads widened, as ECB terminal pricing moved higher (Sep'23 to 2.74%, up 17bp on the session).
• The German curve has underperformed the UK and US, with the latter two seeing some bear flattening in sympathy with the eurozone moves.
• Attention the rest of the session is on the flash German national inflation reading with US PCE prices/spending/income and final UMichigan (all of which will be eyed carefully ahead of next week's FOMC decision).

Latest cash curve yields:

• US: 2Y yield up 9.3bps at 4.3668%, 5Y up 9.9bps at 4.1599%, 10Y up 7.9bps at 3.9978%, 30Y up 3.3bps at 4.116%.
• DE: 2Y yield up 19.2bps at 1.965%, 5Y up 18.4bps at 2.002%, 10Y up 15bps at 2.112%, 30Y up 9.9bps at 2.11%.
• UK: 2Y yield up 9.4bps at 3.232%, 5Y up 10.1bps at 3.581%, 10Y up 7.9bps at 3.482%, 30Y up 3.4bps at 3.544%.
• Italy / German 10Y spread 3.5bps wider at 208.1bps