German bunds gain on subdued inflation, Draghi’s speech in focus

The German bunds gained Tuesday after recent data showed that the country’s inflation remained subdued in August. Also, investors now await the ECB President Mario Draghi speech in Trento in northern Italy today.

The yield on the benchmark 10-year bond, which moves inversely to its price, fell 2 basis points to 0.022 percent, the yield on long-term 30-year note dipped 2-1/2 basis points to 0.603 percent and the yield on short-term 2-year bond remained steady at -0.628 percent by 08:20 GMT.

Germany’s inflation rate continues to be at a low level in August. According to the Federal Statistics Office, Destatis, the country’s consumer prices dropped in sequential terms, but rose on year-on-year basis. In annual terms, Germany’s consumer prices rose 0.4 percent in August. The inflation rate gauged by the consumer price index continues to be at a lower level.  Inflation gauged by the harmonized European Union standards dropped 0.1 percent in sequential terms and accelerated 0.3 percent year-on-year.

As in the earlier months, low inflation in Germany was mainly because of the drop in energy prices, which fell 5.9 percent. Consumer gained particularly from the prices of mineral oil products that dropped in August on a year-on-year basis. Other energy products’ prices also fell year-on-year. Only exception was electricity prices that increased 0.7 percent year-on-year. Stripping energy prices, the inflation rate would have been 1.1 percent in August, stated Destatis.

In addition, the ECB meeting passed without any policy changes or signals on Thursday last week, defying expectations of an extension of QE. We now expect that to be announced in December. The ECB made few changes to its economic forecasts, leaving its key 2018 CPI forecast at 1.6 percent.

While President Draghi maintained that economic risks remain to the downside, he said growth was steady and the data show resilience (presumably to Brexit). The central bank presumably felt little pressure to act, especially with current inflation running in positive territory. Nevertheless, with even core inflation running at less than half the ECBs target of slightly-below-2 percent its easing bias will remain for some time.

Meanwhile, the German stock index DAX Index traded 0.06 percent higher at 10,440 by 08:20 GMT.