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SAGBs Pause for Breath, 10 Y 30Y Yields Run Into Support


Bear Flag Formation

By Luke Heighton
     VIENNA (MNI) - The European Central Bank anticipates ending its asset
purchase program in December, Mario Draghi said Monday, as he confirmed the
bank's medium-term inflation outlook despite "weaker than expected" recent data.
     "The underlying strength of domestic demand and wages continues to support
our confidence that the sustained convergence of inflation to our aim will
proceed, and will be maintained even after a gradual winding down of our net
purchases," Draghi said.
     Here are the key points from his speech in Brussels:
     -- Euro area GDP grew by 0.2% in the third quarter, following growth of
0.4% in both the first and second quarter. The loss in growth momentum mainly
reflects weaker trade growth, Draghi said, but also some country- and
sector-specific factors.
     -- A gradual slowdown "is normal as expansions mature and growth converges
towards its long-run potential. Indeed, looking further ahead, employment growth
is expected to slow somewhat as labor supply shortages become more binding."
Savings ratios will also normalise and temper consumption dynamics to some
degree. This is also reflected in ECB staff projections from September, which
see annual growth at 2.0% for this year, and then slightly lower rates of 1.8%
in 2019 and 1.7% in 2020.
     -- Some of the slowdown may also be temporary, and the latest data already
show some normalising of production in the car industry which has been impeded
by one-off factors. As world trade stabilises, albeit at a lower level, its drag
on growth could also be temporary. "At the same time, risks relating to
protectionism, vulnerabilities in emerging markets and financial market
volatility remain prominent."
     -- Underlying drivers of domestic demand remain in place. Household income,
which underpins domestic demand, continues to be supported by high levels of
capacity utilisation and further improvements in labour markets. The
unemployment rate declined to 8.1% in September 2018, which is the lowest level
observed since late 2008, and employment continued to increase in the third
quarter. "Moreover, business investment is supported by still very favourable
financing conditions in the euro area, together with solid demand and rising
     -- HICP inflation increased to 2.2% in October 2018, from 2.1% in
September. Measures of underlying inflation "continue to be muted, but have
increased from earlier lows. Generally, there is good reason to be confident
that underlying inflation will gradually rise in the period ahead." Wages are
rising as labour markets continue to improve and labour supply shortages become
increasingly binding in some countries. Higher wage growth, "as well as a
recovery in producer and import prices, is expected to continue to support the
upward adjustment in underlying inflation. In addition, long-term market and
survey-based inflation expectations are reasonably well anchored and broadly in
line with this outlook."
--MNI Frankfurt Bureau; +49-69-720-146; email:
--MNI London Bureau; +44 203 865 3829; email:
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