ECB Concedes Energy Pass-Through More Persistent Than Thought Amid US Economic Strength

The European Central Bank (ECB) has revised its assessment of the energy pass-through effect on inflation, conceding that it is more persistent than initially thought. This admission comes as the ECB grapples with rising energy prices and their impact on the economy.

Meanwhile, the US economy continues to show signs of strength, with the flash composite PMI jumping to 58.4 in September from 56.0 in August. This marked the strongest reading since July 2021 and is consistent with approximately 5% annualized GDP growth. Employment growth was the fastest in over four years, while backlogs and supply delays pushed input-cost growth towards a four-year high.

The US Treasury yield rose to its highest level since 2007, trading at 5.14%, as investors reassess their expectations for interest rates. The move appears orderly, with three-month 10Y options carrying only about 79.5bp of annualized volatility compared to 134bp in the last cycle.

The US-China trade truce has been extended until January 10, but rare-earth minerals remain a contentious issue. China controls approximately 70% of rare-earth mining, 85% of refining, and around 90% of magnet/alloy production, while Washington can still determine how much frontier semiconductor capability reaches Chinese firms.