Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Rates Spark: Peak Inflation But Not Peak Hawk

By ING Economic and Financial AnalysisMarket OverviewMay 11, 2022 05:53AM ET
www.investing.com/analysis/rates-spark-peak-inflation-but-not-peak-hawk-200623954
Rates Spark: Peak Inflation But Not Peak Hawk
By ING Economic and Financial Analysis   |  May 11, 2022 05:53AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

The inflation concerns are easing ahead of today’s US CPI reading. We doubt central bankers will back down so soon, however. Markets are coming around to our view that a peak is near in yields, but we think it might still be a couple of months away

US 10yr edges back below 3% on remarkable easing in inflation expectations

The juxtaposition between rising real rates and falling inflation expectations remains, and over the past 24 hours the fall in inflation expectations has been dominant.

And that’s why the US 10yr yield has dipped back below 3%. Right now, US 10yr inflation expectations are in the region of 2.65%. They were in excess of 3%, albeit briefly, a few weeks back, at which point talk of a 75bp hike in June were sounding like a solid call.

Now that inflation expectations are well down, the 50bp promised looks fine.

Meanwhile, the 10yr real yield is now above 30bp. Add that to the inflation expectation and we get the sub-3% 10yr Treasury yield. The move higher in the real yield has been spectacular.

Back in March, it was deeper than -100bp. The move to 30bp is a sign that the economy has morphed away from the need for ultra-loose policy.

And a continued move higher takes it towards a more normal footing. In fact, a 10yr real rate in the area of 1% would not look out of whack. If we got there, inflation expectations would fall far more.

The adjustment higher in real yields is a threat to risk asset valuation

Real Yields Valuations
Real Yields Valuations

Source: Refinitiv, ING

Today’s US CPI number will be important, but not determinative. In other words, it should not have a material impact on the 10yr inflation expectation. That said, if it’s an outsized/surprise number, it’s then more likely to have an impact on the curve.

Our central view is in line with the market view, where we do see a fall in contemporaneous inflation, consistent with the recent tendency for inflation expectations to ease lower. We’ve been surprised by this though, and think it’s too early to call it a trend.

The inflation scare is easing, but beware of circular reasonings

The ‘peak inflation’ narrative should receive a boost from slowing US annual headline and core inflation readings today, but we would be cautious about chasing the move lower in rates.

As always, forward-looking markets could apply a heavy discount to central bank rhetoric, but an acceleration in monthly core CPI means Fed officials are unlikely to change tack just yet.

One should also remember that the decline from the inflation peak will be very slow indeed, keeping pressure on the Fed to act.

Swaps show inflation is no longer the market's only concern

Inflation Swaps
Inflation Swaps

Source: Refinitiv, ING

Further afield, inflation compensation offered by US CPI and Eurozone HICP swaps has dropped significantly this month. Should markets conclude that central banks can now afford to be less hawkish? Only up to a point.

To some extent, the drop in inflation swaps is owing to a deteriorating global macro environment, but the post-FOMC timing of this drop also suggests that it has at least as much to do with expectations that central banks will deliver on expected tightening.

We would be careful with such circular reasonings.

Global growth gloom means holding psychologically important levels will be more difficult

For an example of the doubt setting in investors’ mind about central banks’ ability to tighten policy, look no further than yesterday’s better-than-expected German (Zew) and US (National Federation of Independent Business) sentiment indicators.

None of the readings was enough to alleviate global growth gloom, but the NFIB details in particular could have brought inflation fears back to the fore. We suspect it is too early to call the end of the hawkish re-pricing, with central bankers still very much on their front-foot when it comes to delivering monetary tightening.

Bonds risk failing a psychologically important test

Bonds Levels
Bonds Levels

Source: Refinitiv, ING

We think a better candidate for a peak in yields in this cycle is during the third quarter of this year, after the ECB’s expected first hike and after the couple of additional 50bp hikes the Fed has committed to.

This being said, turning points are notoriously difficult to pick and we have sympathy with the growing view that there is a short time limit to this tightening cycle. Should 10Y bonds fail to hold on to their recent jump above the psychologically important levels of 3% for Treasuries and 1% for Bunds, it may take a lot of good news to test these levels again.

Today’s events and market views

Germany (10Y) and Portugal (8Y) make up today’s Euro sovereign supply slate. This will come on top of a dual tranche NGeu syndicated deal in the 3Y (new issue) and 30Y (tap) sectors. In the US session, the Treasury will auction 10Y notes.

The main release of note in the afternoon will be the April CPI report. Consensus is for the annual readings to cool down from the previous month, but a monthly acceleration in core could muddy the picture for rates.

There is also an extensive list of ECB speakers on the schedule, culminating with interventions from Christine Lagarde and Isabel Schnabel.

Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more

Original Post

Rates Spark: Peak Inflation But Not Peak Hawk
 

Related Articles

James Picerno
Losses Weigh On Markets By James Picerno - Jul 01, 2022 1

As risk-off messages go, the markets couldn’t be any clearer in June. Losses weighed on every slice of the major asset classes, based on a set of proxy ETFs. Even cash took a hit,...

Rates Spark: Peak Inflation But Not Peak Hawk

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email