Italy’s consumer price index (CPI) for June indicates a growth of 1.7% compared to the previous year, aligning with preliminary figures. This is a slight rise from the previous month’s 1.6%.
The harmonised index of consumer prices (HICP) rose by 1.8% year-on-year, slightly above the preliminary estimate of 1.7%. This is an increase from the prior month’s 1.7%.
Core Annual Inflation Trend
Core annual inflation, excluding volatile items, went up from 1.9% in May to 2.0% in June. This suggests a gentle upward trend in underlying inflation pressures.
There was a slight delay in the data release by Istat, the national statistics agency. Despite these changes, the European Central Bank may find these figures manageable compared to inflation in other countries like Germany.
The final data from Istat confirms that Italian inflation is well-behaved, a welcome sign for the European Central Bank. With core inflation at just 2.0%, this stands in stark contrast to the most recent 2.8% HICP reading out of Germany, highlighting a growing divergence within the bloc. We believe this reinforces the case for the central bank to remain patient on monetary policy.
Implications For Derivative Traders
For derivative traders, this suggests that pricing for any near-term interest rate hikes is likely overdone. Historical data from the aggressive 2022-2023 hiking cycle shows how quickly the bank can move, but current conditions do not warrant such action. We see opportunities in positioning for a stable rate environment, potentially through selling out-of-the-money call options on December Euribor futures.
The predictability of this inflation data should dampen expectations for major economic surprises, which typically leads to lower market volatility. In fact, the Euro Stoxx 50 Volatility Index (VSTOXX) has already fallen to 14, down from over 18 earlier this year on geopolitical jitters. We think selling volatility, for instance by shorting VSTOXX futures or selling strangles on the Euro Stoxx 50 index, is an attractive strategy in the coming weeks.
Tame inflation is particularly beneficial for Italian sovereign debt, easing concerns about the country’s fiscal position. The spread between 10-year Italian BTPs and German Bunds has already narrowed to 130 basis points, but we see room for it to tighten further towards the 115 basis point level seen last year. Traders should consider selling credit default swap protection on Italy, as the risk of a blowout in spreads appears diminished.
The data solidifies the view of a more dovish ECB, especially when compared to a Federal Reserve that is still signaling a higher-for-longer stance in the United States. ECB President Christine Lagarde’s recent commentary has been cautious, and this report gives her little reason to sound more aggressive. Consequently, we expect the EUR/USD pair, currently trading near 1.0750, to face downward pressure, making long-dated puts on the Euro an interesting play.
