Source: Bloomberg
Source: Bloomberg

Today’s 1.5% YOY inflation print for the euro zone (unchanged, vs. an expected drop to 1.4% according to the economists’ consensus) sparked a sharp selloff in European bonds, with Treasuries following. That might seem an overreaction, but not to the Germans, whose prices have risen 1.7% year-on-year, driven by rents and food (vs. 1.6% in June and 1.5% in May).

The issue isn’t just that prices have risen a tad faster (mainly driven by food, a temporary factor), but that interest rates on bank deposits are negative and the real interest rate on German government securities is negative 0.8%. Berlin allowed European Central Bank chief Mario Draghi to knock interest rates down below zero in an effort to rescue the flailing economies of Europe’s periphery. His famous “whatever it takes” speech had its five-year anniversary this week, mocked in the German media by comparison to J.W. v. Goethe’s “The Sorcerer’s Apprentice.”

German core inflation remains stable at 1.5%, but that’s cold comfort to Europe’s most assiduous savers. Investors know that European rates have to rise. It costs money to own the euro and sell the dollar, so investors wait for political signals to give into the Euro. Almost any signal will qualify, and today’s inflation announcement prompted a rise in the euro from about 1.66 to 1.740.