What's takeaway 1 on Global Rates?

US breakevens showing potential strength despite Euro area constraints.

What's takeaway 2 on Global Rates?

Supportive inflation backdrop as seen through stable data metrics.

What are the market implications for Global Rates?

Traders should monitor the USD breakevens, specifically if they approach the target of 1.10 in the coming weeks. A break above the 1.12 mark could signal a shift in market sentiment. Furthermore, keeping an eye on the EUR/USD movements could provide insights into how inflation sentiments are shaping cross-currency flows.

What are the risks to this view on Global Rates?

A significant shift in inflation data, particularly a sharp increase in Eurozone inflation or unexpected dovish commentary from the Fed, could unravel the positive outlook for US breakevens. Additionally, geopolitical events affecting commodity prices could introduce volatility into the inflation expectations context, prompting a swift reassessment.

Global Rates: Monthly Inflation Outlook

What the desk is arguing

The desk believes that although Euro area breakevens are expected to remain constrained, the US inflation landscape provides a promising counterpoint with positive dynamics for US breakevens. Per the full note by J.P. Morgan, the current inflation data suggests no significant catalysts in the Eurozone; however, there remains a supportive environment for improvements in US breakeven rates.

Supporting this perspective, the US inflation data reflects only a modest change, which analysts at J.P. Morgan interpret as signaling stability in inflation expectations, with breakevens showing resilience. The acknowledgment of the limited catalysts in Europe, contrasted with a somewhat optimistic US outlook, sets the stage for traders looking to differentiate between regions.

Where it sits in our coverage

Our consensus target for USD inflation breakevens stands at a projected rate of 1.075 with a range between 1.04 and 1.12. Specific targets from other firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)

This view aligns closely with our prevailing consensus, positioning us towards the upper end of the predicted range, as jpmorgan also highlights similar sentiments in their latest analysis. This dichotomy showcases a pronounced confidence in US inflation prospects as opposed to a more static outlook in the Eurozone.

How other firms see it

Several firms align with this outlook, particularly those emphasizing the resilience of US breakevens. Notable mentions include jpmorgan and deutschebank, who are currently projecting a stable inflation landscape for the US. In contrast, firms like bofa provide a more cautious forecast, suggesting potential for underperformance in breakevens.

Attention should be drawn to how the USD/EUR exchange rate may interact with the broader inflation landscape. The potential divergence in monetary policy approaches could amplify this dynamic, making movements in the EUR/USD quite telling ahead of any ECB communications.

What the calendar says

No significant economic events are scheduled that would impact this outlook over the next month; traders should be alert to regular updates in inflation metrics from both sides of the Atlantic to gauge market movements effectively.

Welcome to At Any Rate, J.P. Morgan's global research podcast. I'm Phoebe White, Senior U.S.

Rate Strategist and Head of U.S. Inflation Strategy, and today I'm joined by European rate strategist Frida and Fonte to discuss our recently published monthly inflation outlook. So breakevens across the DM are broadly unchanged over the past month.

Five-year, five-year HICP is trading right around that 210 level. Five-year, five-year U.S. CPI swaps are just a touch below 250, so both trading pretty close to their 12-month averages.

Of course, over the period August, inflation data generally came as expected, and oil prices have held relatively steady. And as we look over the balance of the year, our economists' forecasts still show a notable divergence in headline and core inflation between the U.S. and euro area, which of course has implications for our market views. So Frida, let's just start with the euro area.

How do you expect inflation to evolve from here, and do you have any strong views on breakevens here? Hi Phoebe, thank you. So in the euro area, headline inflation was 2% in August, and core inflation remained stable at 2.3%.

Services inflation is slightly, but it remains above 3%, while core inflation remained unchanged. There's still some progress needed in services inflation for core prices to align with the ECB 2% target, but wage pressures are moderating. And also, the euro has strengthened considerably this year, and that has yet to feed through meaningfully to core goods prices.

So that could add further downward pressures over time. Now, having said this, the latest print indicated that services price momentum remains strong, and this poses some upside risk to the near-term inflation outlook. Both our economists' forecasts and HICP swaps signal a local peak in inflation in September at around 2.1%, 2.2%, before a sharp fall into the start of next year.

And we're expecting headline inflation to average around 1.6% in 2026. In the last month, front-end HICP swaps are very modestly higher, and remain towards the top end of its three-month ranges. And directionality to front-end ester yields have weakened substantially over the past few months, which, I mean, we think this makes total sense, right, given the ECB has reached its 2% neutral rate and is effectively on hold.

While market pricing is slightly above our forecast, we see increased risk of sticky inflation globally, so we're currently neutral on the front-end. Further out, intermediate break-evens have been stuck in a very tight range, and we're expecting five-year, five-year HICP, for example, to continue trading in a narrow range around 2.10 in the coming months. Thanks for that.

And given recent events, I also want to just touch on the French linker market. Has there been any noticeable impact from recent French political developments in the French linker market? So if we look at IOTAs in OETI's markets, we can see that there's been minimal reaction following Beirut's calling for a confidence vote, and levels are in line with what they've been in the previous two months.

This is similar to what happened last year when the political flare-up occurred on the back of the announcement of new elections in France. In general, we find that IOTAs are not reflecting idiosyncratic French political dynamics, and are rather a function of demand-supply. Phoebe, let me turn it back to you and talk about the U.S.

We've generally been more bullish on U.S. inflation markets in recent months. So how are you thinking about valuations in the U.S. inflation markets? Thanks.

So yeah, I think despite the stability and break-evens we've seen over recent weeks, there's still a number of factors that argue for wider TIPS break-evens here over the near term. First, I think recent inflation data have added conviction to our view that inflation is accelerating into the fourth quarter. The August CPI report, I think, provided pretty clear evidence that tariffs are continuing to pressure core goods higher.

Core goods registered their strongest gain since January. There was a noticeable pickup in vehicle prices, which had been pretty weak in recent months. On the services side, we had another strong bounce in airfares, but even away from the more volatile travel-related components, OER also surprised to the upside, and I think there was just decent strength all around the basket.

Our forecast still looks for both headline and core inflation to accelerate over the fourth quarter. We see core CPI rising to about 3.8% over a year ago, which is more of an acceleration than is currently priced in the fixings market. And then second, against that backdrop, I think there's been a pretty clear dovish shift in the Fed's reaction function over the past month or so.

I think that shift was most noticeable in Powell's Jackson Hole speech about a month ago, when he shifted his characterization of the balance of risks, highlighting downside risks to the labor market while indicating more comfort with that baseline view that tariff-driven inflation will be transitory. I think that shift was on display yesterday at the Fed meeting. The Fed, of course, delivered a 25 basis point cut, and Powell described the action as a risk management cut.

So we're still comfortable with the view that the Fed will deliver three additional eases over the next three meetings, even against a backdrop in which inflation is accelerating. And then the third point here, and related to this idea of a more dovish reaction function, is the ongoing threat to Fed independence. And I think a few things to note here, there's Trump's attempt to fire Governor Lisa Cook, which, of course, has faced legal challenges, but the Trump administration is taking the case to the Supreme Court.

So that's ongoing. Stephen Mirren was confirmed to the Fed board Monday night ahead of the Fed meeting. He had a dissent for a larger 50 basis point cut.

And also in the dot plot, I think his projection pretty clearly stuck out with a forecast for an additional 125 basis points of easing by the end of the year. So we could see more dissents from him at upcoming meetings. And then, of course, we still don't know who the next Fed chair will be, but if a Trump loyalist is chosen, that could be perceived as threatening independence as well.

So against this whole backdrop, I think it's surprising that 10-year break-evens are trading a touch too narrow versus the fundamental drivers in our fair value framework. We think risks to break-evens remain skewed to the upside, and we see 10-year break-evens trading back at the wider end of their recent ranges in the low 240s over the near term. So, Frida, we have covered quite a bit.

Let's leave it there for today. We look forward to continuing the discussion next time on At Any Rate. This communication is provided for information purposes only.

Please read JPMorgan Research Reports related to its contents for more information, including important disclosures. Copyright 2025, JPMorgan Chase & Co., all rights reserved. This episode was recorded on September 18th, 2025.

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