Governor Emmanuel Moulin tied euro-area inflation to oil and warned of a link between crude, U.S. long rates and Europe's. Greek yields are now about half a point above where September began, and the ECB publishes its meeting account today.
| FXE, EZU, EWQ, EWI, GREK, EUFN
Europe's central bankers and its bond buyers are offering two different explanations for the same selloff.
Emmanuel Moulin, who runs the Bank of France, put a number on it Thursday. European inflation, he said, is "100%" an energy story, and what began as a geopolitical disturbance has now become a financial one. He tied crude, long-dated U.S. yields and European borrowing costs together through what he called a "strong correlation." What he does not foresee are second-round effects, in which energy costs spill into wages and broader prices.
Olaf Sleijpen, head of the Dutch central bank and another member of the European Central Bank's governing council, described longer-run inflation expectations as "well anchored."
What the diagnosis implies
If inflation is almost entirely imported energy and expectations are stable, the case for the ECB to keep tightening weakens, because higher rates do little to lower the price of oil. Moulin's framing points toward a central bank inclined to look through the shock rather than chase it.
It also implies that Europe's bond selloff is largely borrowed from abroad. Both of the forces he named were moving Thursday morning: Brent was up about 4%, above $104, and 10-year Treasuries yielded about 5.33% after a 24-year high overnight. On Moulin's account, European yields are following those two moves.
What the market is pricing
The bond market's behavior fits a fiscal story at least as well. The pressure is concentrated in the most indebted borrowers and is spreading outward. Greece's 10-year yield reached about 4.51% on Thursday, roughly half a percentage point above its level at the start of September, in about five weeks. Italy's 10-year rose to about 4.68%, and France's to about 4.92%.
Lenders that hold that debt are falling with it. Deutsche Bank, Santander, Société Générale and UniCredit each declined for a second straight session, pulling Europe's bank index down nearly 2%. The region's broad benchmark, the Stoxx 600, slid about 1% and has not been this low since June. The euro, near $1.1185, sits close to a 17-month low.
A day earlier, Moulin called France's economic position serious while insisting the country can manage without ECB support. At UBS Global Wealth Management, multi-asset strategist Kiran Ganesh warned that markets "are going to be watchful if that contagion continues," and drew a lesson from 2011: "monetary authorities will turn to the fiscal authorities first to get their house in order."
Energy Shock or Fiscal Risk?
One reading follows Moulin. The selloff is an imported energy and rates shock, inflation expectations are anchored, and European yields would ease if oil and Treasuries do, with little need for fiscal or central-bank intervention.
Another reading is that a pure energy shock would lift yields across the region more evenly. The concentration in France, Italy and now Greece, and the losses at banks that hold their debt, suggest investors are demanding a premium for fiscal risk that energy alone does not explain.
Today's account
The ECB publishes the account of its September meeting on Thursday, which will show how many policymakers share Moulin's view that energy is the whole story. Finance ministers meet at the Eurogroup the same day, and Moody's reviews France's rating on . If Greek and Italian yields keep rising on a day oil falls, the fiscal reading gains weight.