Global Rates: Monthly Inflation Outlook
The desk argues that the inflation outlook, particularly for US breakevens, remains cautiously optimistic despite a lack of immediate catalysts for broader movements in Euro area markets. Per the full note by J.P. Morgan, while there is little momentum to drive higher Euro area breakevens, the US has a supportive backdrop with potential for gradual strengthening in inflation expectations. This thesis reflects broader concerns regarding inflation data and expectations from major economies, emphasizing that factors like commodity prices and central bank policy remain key drivers moving forward.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01US breakevens showing potential strength despite Euro area constraints.
- 02Supportive inflation backdrop as seen through stable data metrics.
- 03Divergent perspectives between firms highlight uncertainty in Euro region.
- 04No immediate market events expected to disrupt this narrative.
Market implications
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.
Risks to this view
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.
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.
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