The spread between German 2-year and 10-year Bund yields fell to -27 basis points yesterday, which was the biggest reversal since October 1992. That spread has now narrowed slightly to -24 basis points. base, but long story short, an inversion of the yield curve as such is usually a signal that recession fears are building.
As we look to next year, soaring inflationary pressures and the current energy crisis will continue to put pressure on the European outlook. The only consolation so far is that the start of winter has come with milder weather than expected.
But as long as price pressures remain elevated, the ECB will be stuck between a rock and a hard place trying to continue to tighten policy or consider a pause as the economy begins to slump.