Investors and policymakers are back again weighing the possibilities of deflation if China slows down further and commodity rout continues. China is extremely prominent in global trade, especially in commodity space, which makes the developments in the country extremely vital for global inflation, which continues to lag all the growth.
- US inflation expectations as measured by 5 year- 5 year (5y/5y) inflation expectation using swap dropped to lowest level in 5 years. It is even worse for one year break even inflation, which since July has been declining steadily beyond negative and now hovering below 1.5%.
- Euro one year inflation swap has fallen below zero for first time since February, when European Central Bank (ECB) introduced monetary stimulus of almost € 1.1 trillion or asset purchase of €60 billion per month till September next year.
- German 2 year bond is steadily hovering below ECB deposit rate of -0.2% for quite some time now.
Return of deflationary fear is likely to weigh on central banks' policy makers decision who are fighting with aggressive monetary stimulus to fight deflation.


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