Watching with interest the continuation of the deflationary trend of peripheral yields in conjunction with the brewing turmoil in France given the recent dissolution of the latest government, we decided this week to use a relatively simple analogy, using the 2006 third opus of the "Fast and Furious" movie saga entitled "Tokyo Drift" as our title given the on-going "Japanification" process of Europe.
Peripheral yields have been subdued even without the OMT being triggered. In similar fashion, the Euro has weakened without even QE being launched.
In this week's conversation, we will review the acceleration of the deflationary trend we are seeing and what to expect: QE or no QE?
When it comes to the "inflationary" trends in Europe, the deceleration of inflation has been intensified by the volatility in energy/food prices as indicated by Bank of America Merrill Lynch in their note from the 22nd of August entitled "Tracking deflation: more worries":
Another significant indicator of the deterioration of inflation expectations in Europe can be seen in spot inflation break-evens in the same report, showing the various maturities falling in concert:
To that effect, Mario Draghi has once more played a very smart hand in lowering the Euro without even firing his QE bazooka. We agree with Morgan Stanley's comment from their latest FX Pulse note from the 21st of August that lowering the value of the euro was indeed an obvious monetary policy goal:
We also commented at the time: