Buy 5Y5Y US vs. Sell EUR inflation swap

Recent market dynamics highlight a notable inflation repricing between the US and EUR , driven by two emerging themes. Germany's infrastructure and defense plan is poised to potentially increase long-term inflation expectations in Europe. Conversely, uncertainty surrounding a possible US recession and tariff fluctuations has clouded the outlook for US inflation, leading to a tightening of the 5Y5Y US-EUR inflation swap from 33bp to around 25bp . Looking ahead, we think that the market may be overestimating the impact of the German plan on inflation , as concrete data supporting significant inflation increases may not materialize until late next year. In the US, while recession fears have dampened sentiment, we are expecting a rise in inflation in the next few months that could bolster US inflation swaps. Given these factors, we recommend selling the 5Y5Y EUR inflation swap vs. buying the 5Y5Y US inflation swap , with an entry at 2 4 bp, a target of 3 9 bp, and a stop at 15bp, as we expect the divergence in inflation outlooks to continue.