Great Graphic: UK and Eurozone Core Inflation Slump

That the eurozone is experiencing lowflation, which is threatening to morph into deflation, is well appreciated. What is less appreciated that it is not just a function of ECB policy. 

The UK and Sweden both reported softer than expected inflation data. And it is not just in Europe. China is expected to report CPI figures in the next day or two that will show price pressures there have eased to their lowest level in two years.

This Great Graphic was tweeted by Berenberg Economics.  It shows the core inflation rate in the UK and the euro area.  Clearly, the UK price pressures easing toward the eurozone levels, rather than the UK pulling up the eurozone rate.  As UK inflation has eased, interest rate expectations have shifted considerable.  In June, the March 2015 short-term futures contract implied a yield of 120 bp. Today, the implied yield has fallen to 65 bp, the lowest since May 2013.   The SONIA strip now implies the first rate hike has been shifted to Q4 15.  

In June, the March 2015 Euribor futures contract implied a 20 bp yield.  The contract high was set earlier this month, with the implied yield of 4.5 bp.  Today it is 8.5 bp.   For comparison, in July, when US rates peaked, the implied yield of the March 2015 Eurodollar futures contract peaked near 45 bp.  Today the implied yield is 25 bp, a record low.  The December 2015 Fed funds futures contract now implied 48 bp effective Fed funds rate at the end of next year.  The dot-plot of Fed forecasts is for 137.5 bp.