Global Rates: A Mixed Bag of Inflation Market Views
The current inflation narrative is complex, highlighting diverging views across major economies like the Euro area, the UK, and the U.S., as emphasized in a recent podcast by J.P. Morgan Research. Per the full note, the mixed assessments in the inflation outlook could indicate a broader uncertainty in monetary policy direction, which may affect trading strategies. A key takeaway from the discussion is the varying breakeven inflation rates and their influence on market expectations for central bank actions. The landscape could lead to increased volatility in FX pairs, particularly between USD and GBP as traders reassess their positions amid this uncertainty.
What the desk is arguing
The discourse on global inflation hints at a mixed outlook, posing risks for traders navigating the FX landscape. According to insights from J.P. Morgan, discrepancies in inflation expectations across different regions may create inconsistency in market responses, suggesting nuanced strategies could be beneficial.
The U.S. inflation print remains pivotal, with recent data reflecting stabilization, yet differing views across the Eurozone and the UK introduce complexity in the breakeven markets. Coupled with shifting investor sentiment, this could drive a reassessment of long positions in currencies most sensitive to these inflation trends.
Where it sits in our coverage
J.P. Morgan's analysis aligns closely with a target of 1.10 for the EUR/USD pair, positioning them amidst current market expectations. Their perspective offers a somewhat bullish stance, aligning within the following consensus: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This outlook reflects a divergence where jpmorgan anticipates a stronger euro against the dollar, while bofa takes a more cautious approach, placing their target lower at 1.04, marking a significant gap in expectation.
How other firms see it
Market sentiments are generally split, with jpmorgan aligned on a bullish path, while bofa presents a contrary view expecting depreciation against the backdrop of a more hawkish Fed stance. This divergence highlights the uncertainty within major currency evaluations.
Traders should closely observe the dynamics of the EUR/USD pair and how inflation forecasts from the ECB and the BoE play into these projections, as they will significantly impact market stability.
01Diverging inflation views across the Euro area, UK, and U.S. highlight significant market uncertainty.
02Recent U.S. inflation data could influence central bank policies and risk appetite in global markets.
03Traders may face volatility as breakeven inflation rates fluctuate across different economies.
04Active monitoring of FX pairs like EUR/USD is critical as the situation develops.
Market implications
With market expectations for the EUR/USD pair currently around 1.10, watch for fluctuations as fresh data from inflation prints may provide catalysts for significant repositioning ahead. This volatility will require traders to adapt to potentially shifting dynamics in monetary policy guidance from both the ECB and the Fed.
Risks to this view
Key risks include a surprising uptick in inflation data that could lead central banks to adjust their policy stances more aggressively than anticipated. Additionally, unforeseen geopolitical developments or economic shocks could impact market sentiment and invalidate the current bullish outlook.
Hi, everyone, and welcome back to At Any Rate, J.P. Morgan's global research podcast. I'm Harry Downey from the U.S. rates strategy team.
And today I'm joined by Frida Infante from our European rates strategy team. And we're going to discuss this month's inflation outlook. Over the past few months, inflation markets have been driven by really one headline after another around energy prices, geopolitical tensions.
But more recently, we're seeing a bit more of a nuanced story. Commodity prices, of course, remaining important with Brent crude oil still at around eighty seven dollars at the time of recording up forty five percent since the start of the year. And energy markets still have their bouts of volatility.
But at the same time, we're starting to see markets increasingly focused on how central banks will respond. What from the inflation data tells us about the trend of inflation going forward and whether or not long term inflation expectations are beginning to shift. We're seeing those similar themes in the U.S. and globally, but with with some regional nuances such as the impact of weather in Europe.
And that's driving really a mixed bag of inflation views for us here at J.P. Morgan. So there's plenty to discuss.
And I'm really glad to have Frida with me to dig into it. Thanks for joining, Frida. Thanks, Harry.
Shall we go with the U.S. first? So perhaps the best place to start is with the question that's been driving U.S. inflation markets recently. How much of the story is about the data and how much is about the Fed?
Yeah, thank you, Frida. I think it's both. But in the last few weeks, the Fed has become an increasingly important part of that story.
Earlier this year, inflation markets were really focused on commodities. If oil moved front end inflation pricing moved with it. But that linkage is starting to fade a bit, in part because of the reduced volatility in commodity prices, but also because inflation markets are becoming less reactive to those moves.
In the report, we note that front end inflation beta to commodity prices has fallen and converged with intermediate and long end of the curve, which is interesting because oil moves should really be a front end story. So it raises the question of whether or not there are other drivers which are affecting the rest of the U.S. inflation curve, or maybe the oil story is spilling into credibility. And we definitely think it's in part because of the latter.
After hearing an update on the Fed's reaction from Chair Walsh in the latest FOMC meeting, while Chair Walsh has come into the new position talking tough on inflation, the July FOMC meeting, it wasn't necessarily taken that way, a view we share here at JP Morgan. And five-year, five-year U.S. CPI moved higher on the back of it.
And we think it's because of a hit to credibility on the back of Walsh's messaging. If we're digging into the details there, I think the key reason for that for markets was in the press conference. What really caught our attention was that Chair Walsh focused less on rates being the sole tool for fighting inflation, and more on a broader view of inflation itself.
He suggested that the balance sheet could do some of the heavy lifting that would otherwise come through interest rates. And he appeared to look beyond what is traditionally seen as the Fed's preferred measure of inflation, called PCE, and towards a wider set of inflation measures, which is important because core PCE is running a lot hotter than other measures, and our estimates for core PCE relative to CPI, core PCE is running about 0.8% higher than core CPI at the moment for our estimates for July. He also sounded less convinced that recent supply shocks are necessarily feeding through into broader inflation.
And so taken together, that led to an update in our view of the Fed's reaction function and so far to the markets as well, because increasingly, people are going to be asking how the Fed will respond in reaction to inflation. And for now, it seems they maybe respond less in terms of interest rates going forward, which means that all else equal, we should have a steeper curve here in the US and slightly higher inflation expectations. Interesting.
So, WASH does not seem to have the reaction function markets perceived from the first press conference. Now, the July CPI report was broadly in line on the headline numbers, but you've argued that the details were a bit firmer beneath the surface. For listeners who don't spend their days looking at inflation releases, what stood out to you and what does it tell us and the Fed about where inflation may be headed from here?
Yeah, I would not call the July CPI report a real game changer for inflation markets, but we do think it mattered. The headline number and the core number were broadly in line with expectations. Core CPI rose 22 basis points for the month of July.
So that wasn't really a surprise in and of itself, but we do think there was some interesting details beneath the surface. One thing that stood out was goods inflation. We've been going through one of the weakest periods for goods inflation since 2024.
But in July, we saw core goods prices begin to rise again after declining in both May and June. And it's still early, but that might be the first sign that we're seeing some of the tariff-related drag on goods inflation beginning to fade, given those tariff rates for the US peaked towards the end of last year and earlier this year. Also, we saw shelter come in a bit firmer.
Both rent and owners' equivalent rent rose 26 basis points month over month, above the average pace we saw earlier this year. We've had some distortions around shelter, given the government shutdown last year. So this is one of the first cleaner reads we've had on housing inflation.
And it's been an open question for inflation markets, what direction will this take, given some of the near term gauges of rents have been running at a cooler pace than shelter inflation for CPI. And it's something the Fed's going to continue to watch closely. But it's also worth noting the PPI report we got yesterday.
And this was also interesting for inflation markets. A headline read for producer price index was soft, with final demand essentially flat in the month. And this drove a rally in yields and pushed market pricing for a full Fed hike into 2027.
But we also took a more nuanced read of this data. The components of PPI, which feed directly into PCE, the Fed's preferred inflation gauge, actually came in somewhat firmer. And so our estimates ticked up for the July call PCE, mainly from a rise in portfolio management expenses.
And that's why the market reaction was really so interesting. Headline PPI looks soft, the market trade off the back of it, but it actually was pointing to a firmer inflation picture for the Fed's preferred measure. So when you put that together, CPI and PPI, I think the takeaway is the inflation story is giving ammunition to both sides, both the doves and the hawks.
And you could argue both way. And it leads a Fed which, especially after Chair Walsh's last press conference, which is likely going to use it to stay on hold, at least in the September meeting. That's why I would describe the July data as informative rather than conclusive.
And it's why we've continued, in our view, to see a steepening of the curve since the press conference. OK, so not a conclusive report, leaving the August CPI report as the key data point ahead for the September meeting for the Fed. One topic that comes up a lot in inflation markets is carry.
It sounds technical, but it can have a big influence on performance in the short run. Right now, carry is quite negative across much of the market. What does that mean in practice, and how do you balance those near-term headwinds against your broader view on inflation over the medium term?
Yes, carry is one of those terms that sounds much more complicated than it really is. The way I like to think about it is the negative carry is a higher hurdle that investors need to beat to make a return. And right now, that carry is quite negative across the inflation market, actually in the bottom 4% of observations over the last five years.
But the important point is that negative carry has historically worked like a contrarian indicator, especially when it's as negative as it is today. And that's something we outlined in our monthly inflation report. Subsequently, it's not as negative a sign for the inflation market currently.
And so wrapping all together, Frida, we touched on a few things, the data, Walsh's comments, carry. Firstly, we still don't have a compelling reason in the data for the Fed to move. The CPI and PPI sending makes signals on the underlying inflation trend.
Secondly, we think the market will read those data releases as being patient for the Fed, given Walsh's comments at the last FRMC. And thirdly, we don't think investors should stay away from the market because of negative carry, because somewhat counterintuitively, we've seen it as a contrarian indicator over the past five years. As such, we continue to see upside risk to inflation rates here in the US, and interestingly, even more so than Europe at the long end.
So Frida, maybe that's a good point to turn it over to you. And what did the latest inflation print tell us about European inflation? Thanks, Harry.
So in July, both Headline and Core HICP moved up. Headline rose to 2.9 year on year, and Core to 2.5. Core momentum is still running high.
It's at around 2.5 at an annualized pace. And I think the composition was interesting because this time, unlike in the previous print, the gain was led by core goods rather than services. But the broader macro story hasn't really changed since last month, and we keep cycling through the same geopolitical pattern of de-escalation and re-escalation.
The latest bout of Middle East tensions has lifted Brent back to towards $90 a barrel, as you said, and gas to around 60 euros per megawatt hour. So unless energy prices fall from here, we'd expect path through to inflation continuing in the August data. And yet, given the scale of the energy shock, inflation hasn't spiked the way you might have feared.
That's a really important point. This has been the largest energy supply shock on record, but so far, it's produced only average price outcomes. Two things have offset the disruption.
First, a faster-than-expected supply ramp-up outside of the Persian Gulf, and second, simultaneous demand disruption. So those two forces have cushioned the blow, but here's a concern. The longer this energy disruption drags on, the greater the risk that those offsets start to fade.
We've also got some weather-related risks on our radar for this month. There are two things we're watching. The first is El Niño and its potential path through into food prices, but our economists think that path through from this is likely to be mild, with local weather events mattering more for euro-area food.
The second is the drying up of the River Rhine. The inflation impact there really depends on how long the low water levels persist, but price prices have already risen considerably, more than they did back in 2018 and 2022, when water levels last fell. So that adds some very modest upside risk to inflation.
Amazing. So they're the risks we're watching. How does that compare with market pricing?
Yeah. So market-implied fixing is averaging 2.9 for 2026 and 2.5 for 2027. Both of those sit above our economists' forecast, which are at 2.7 and 2.1, respectively.
But on balance, we still see the risk to inflation skewed to the upside. When you layer the extreme weather uncertainty on top of the energy backdrop, we think the market pricing for both years could keep repricing higher. Looking a bit further out, one-year, one-year HICP has been quite volatile.
It's drifted back a bit after the latest re-escalation peak to towards 2020-ish, but it's continued to oscillate at relatively high levels if you compare it with how much oil has retraced. But that's also got to do with how high gas levels are right now. On our short-term RV model, for example, one-year, one-year HICP actually screens models with cheap versus nominal yields and oil.
So with the upcoming prints likely to stay sticky and the risks skewed to the upside, we think the front end could rally. However, this is where I'd be careful, though, because liquidity is thin over the summer, and the very front end is prone to big flow-driven swings. So rather than taking a view outright, we like to look at low beta proxies.
A 2s5 HICP flattener, for example, behaves like a roughly 50% proxy for long in the front end. And also, more from a macro perspective, if we did get a material re-escalation, which is not our base case, but if we did get it, and a big move higher in oil as a result, that could actually add downside risk to growth, which would put even more flattening pressure on that 2s5's curve. So I think it's an efficient way to lean bullish while still staying protected.
Now, if you want to think more RV, for example, I'd also note that the belly of the 2s5's HICP fly looks about 8 basis points rich versus the level of the belly. Further out, 5-year, 5-year HICP has kept range trading in the 2s10 to 2s20 band we've been highlighting for a while, like this has been there for a month, which is important because on real yields, 5-year, 5-year synthetic real-year yields have drifted up towards the top of their six-month range. But when you decompose the moves, it's really been driven by the nominal yield, not by inflation.
And that's consistent with our view that intermediate HICPs is fair and range-bound. So nominal space is probably better when thinking about fading these moves in real yields. Interesting.
So there's some stability at the long end of the inflation curve in Europe. That's not necessarily what I was talking about for the US. So how are you comparing the two, Frida?
Yes. So we've seen a widening divergence between the euro area and the US on medium-term inflation expectations. In the euro area, those expectations remain firmly anchored by ECB credibility, while in the US, as you said, you guys see rising medium-term inflation expectations and risk premia after Chair Warsh comments on the balance sheet and on the Fed's inflation target.
So we'd expect the euro intermediate inflation to underperform US inflation in this kind of scenario. So we think the cleanest place to look for that is further out the curve, like 5-year, 5-year, 10-year, 10-year sectors. Makes sense.
Let's move across the channel. The UK has been caught up in the same energy gyrations, hasn't it? Where does that leave your inflation forecast?
Yeah, it has. I mean, the oil story is similar to the euro area, of course, but the bigger moves have been in gas. Front UK natural gas has climbed to around 149 pence a therm, back towards the high end of its Middle East conflict range.
And the rally has been right across the forward curve, with the largest increases in contracts all the way out to early 2027. So that mostly reflects historically low European gas storages ahead of the whole, like, winter build-up season, as well as the news flow around the potential reopening of the Strait of Hormuz and the Oman-Iran negotiations. And we've been here before.
The June MOU collapsed once US and Iranian strikes resumed, so we still stay worried that tensions could re-escalate again if a deal isn't reached. On the forecast, headline CPI is still on track to peak above 3% in late 2026 or early 2027. And given current energy prices, we expect the oil cap to rise 0.4% in October, and then a more substantial 6.6% in January.
Put that together with oil above $85, and we see CPI rising to 3.2% in the fourth quarter, and then peaking around 3.4% in the first quarter of next year, with the core then peaking, like, around 3% in the fourth quarter of 2026. If we move to RPI, we see it rising close to 5% in late 2026 and staying above 4.5% through the first half of 2027. And crucially, our average RPI forecast for the first half of 2027 sits around half a percent above what the swap market is pricing, which is quite a meaningful gap.
There's also a clear difference with the Bank of England. In its July report, the Bank of England central forecast has inflation down to 1.9% in the final year, and it actually lowered its peak to 3.2% below a round, probably reflecting a lack of clear second round effects from the energy move so far. I think it's worth flagging, though.
The BOE's adverse scenario, though, it assumes oil peaks near $110 and gas near 200 pence a term. And in that world, headline CPI rises to around 4.5%. Amazing.
So above market inflation forecast, we've maybe risk skewed higher. How are you thinking about the curve, front end through to the long end? At the front end, one-year, one-year RPIs traded in about a 35 basis point range over the past few months, mostly on oil and gas, and current levels are around 10 basis points above their three-month average.
It screens fair value in RV versus one-year, one-year SONIA and once you adjust for oil and UK gas, though the partial betas can be quite choppy over the short term, so over the short horizon. So given the uncertainty around the near-term path for the conflict and energy, we have quite a neutral view on the front end, not much edge in taking a strong view there. In the intermediate sector, it's been much calmer, of course.
Five-year, five-year RPI traded in just a five basis point range, since our last note, it's hovered just above 3%. And on RV, it screens about five basis points cheap versus its drivers. So for the drivers, we use five-year, five-year SONIA, front-end, trade where it's dirty, and we also have our UK growth factor.
So historically, five-year, five-year RPI has decoupled from SONIA at times, but over the past month, its directionality to nominal yield has picked back up. To be fair, since the start of the Middle East conflict, it's shown a strong positive relationship with Brent, roughly three basis points for every $10 a barrel move in oil. So here's the nuance.
Given that cheapness, this part of the curve looks attractive if you want to position for a re-escalation and a rally in oil. But because our visibility on the path of the conflict is so limited, we expect modest range trading to continue as well. The long end, by contrast, is the more structural story.
We think the risks are skewed towards a flatter curve at the intermediate to long end. It's at a steep level, like outright levels, and it has an empirical convexity. So like, for example, a rally in the very long forward shouldn't steepen the curve much, but if, say, 15-year, 15-year RPI drift towards 3%, it should flatten materially.
One technical to keep in mind is there's been some long-end linker buying after the UK TI41 linker migrated out of the FTSE 15-year plus index, and that's probably supported the long end a bit, but it should fade going forward. And then finally, real yields. 10-year real sterling flat bills have basically followed nominals. They sold off around 25 basis points during July, then retraced a bit into August, and are back to around 130.
Even after that, they're within five basis points of their multi-decade high from the end of July. So cheap, historically. Real yields on the 10- and 30-year linkers are high too, and they keep screening cheap in our valuation framework.
So we have a constructive view on UK real yields, and it's not just valuations. There's a structural anchor to it too. Over the long run, we think UK trend growth is unlikely to run above 1% with limited productivity growth, and that should put real yields lower than where the market's got them right now.
Thanks, Frida. And you've also got a new PM in the UK in July. Anything we should be watching on the political side?
Yes, and this was potentially a big deal. At the end of July, the New Burnham government published a framework that they're calling Rewiring the State. It's a major push on regional devolution, a large transfer of powers, resources, and functions from central government to elected mayors and local authorities across England.
More control over local transport, public services, even local tax revenue. So from 2028, central grants would be replaced with a share of local income tax, and there's a fuller roadmap due at the October budget. The scale of it is historically unprecedented, but honestly, it's too early to really judge the impact on UK fiscal metrics, growth, or productivity.
So we need to see the details on the timetables first. So for the Frida Cross for 10-year real yields right now, the Frida Cross is limited, but it's firmly on our watch list into the October budget. Well, that's all from us, and thank you for listening.
Stay tuned for more updates on the fixed income space here on At Any Rate, J.P. Morgan's global research podcast series. This communication is provided for information purposes only.
Please read the J.P. Morgan research reports related to its contents for more information, including important disclosures. Copyright 2026, J.P.
Morgan, Chase & Co., all rights reserved. This episode was recorded on 14 August 2026.