The gap between the 2-year and 10-year German bund yields fell to -27 bps yesterday, which was the widest inversion since October 1992. That gap has narrowed slightly now to -24 bps but long story short, an inversion of the yield curve as such is typically a signal that recession fears are building.
As we look towards next year, soaring inflation pressures and the ongoing energy crunch will continue to put the pressure on the European outlook. The only consolation so far is that the start of winter has presented with milder weather than anticipated.
But as long as price pressures stay elevated, the ECB will be locked between a rock and a hard place in trying to keep with tightening policy further or look towards pausing as the economy starts to run into the ground.
