Inflation back to pre-Covid levels, but not right away
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INFLATION BACK TO PRE-COVID LEVELS, BUT NOT RIGHT AWAY
While the U.S. market is pricing breakeven rates in the long end below the Federal Reserve's inflation target of 2%, some investors are wondering whether the economy is shifting to the pre-Covid low inflation regime.
"The longer-term bullish thesis for bonds rests on the idea that this shift back to the old regime makes sense, and we are partial to this idea,” says Jabaz Mathai, head of G10 rates and forex strategy at Citi.
The breakeven rate is the spread between the nominal and real yields for the same maturity, representing a measure of expected inflation.
"Perhaps the market is a bit too aggressive in pricing this transition, especially if financial conditions start easing again when the Fed delivers rate cuts and causes inflation risk premium to rise," Citi's Mathai argues.
Citi expects the 10-year TIPS breakevens to bounce to 2.25%-2.3%, which would still be in the range of 2010-2018.
"China's continuation of its industrial policy has created excess manufacturing capacity at the same time that the U.S. and other countries have been trying to ramp up domestic production to overcome supply chain dependencies in the aftermath of the pandemic experience," he adds.
"This is creating a glut of goods and depressing inflation globally despite the imposition of tariffs."
Technological innovation, which has been instrumental as a secular disinflationary force, continues to exert its influence post-pandemic.
(Stefano Rebaudo)
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EARLIER ON LIVE MARKETS:
TECH LEADS THE REBOUND CLICK HERE
EUROPE SET TO BOUNCE BACK CLICK HERE
CHINA STILL BUSY EXPORTING DISINFLATION CLICK HERE
EU open https://tmsnrt.rs/47lWHdF
US10Ybreakevens https://tmsnrt.rs/3AZTrJa
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