ECB CANDIDATE KNOTT: CORE INFLATION, SECOND-ROUND EFFECTS WILL LIKELY PICK UP

An ECB candidate, identified as Knott, stated that core inflation and second-round effects will likely pick up. The remark points to the risk that price pressures broaden beyond energy and goods into wages and services, which would keep the ECB's policy stance restrictive for longer than markets may currently price. The transmission channel runs through inflation repricing: a higher expected path for core CPI lifts short-end euro rates and steepens the front of the euro swap curve, while widening the rate differential against markets where disinflation is further advanced. Euro-area government bond yields, particularly at the two-to-five-year maturities most sensitive to ECB expectations, and the euro itself are most directly exposed, with rate-sensitive equities also vulnerable to a higher discount rate. The next concrete catalyst is the euro-area flash HICP release, especially its core component and services inflation, which will show whether the pickup Knott described is already underway.

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