Lead — With mounting inflation concerns dominating the current economic landscape, the desk emphasizes the urgency to monitor global commodity prices and their impact on US inflation metrics. Per the full note from BofA Global Research, the recent CPI preview indicates a critical moment for traders, particularly as inflation pricing adjusts in response to market conditions. This backdrop is crucial for understanding the potential ripple effects across forex pairs, especially USD-related trades. In light of upcoming tensions in commodity markets and adjustments from the Federal Reserve, traders should position accordingly ahead of pivotal economic data releases.
What the desk is arguing
The desk maintains that inflation risks are intensifying, particularly as fluctuations in commodity prices begin to influence global interest rate trajectories. This perspective aligns with insights gathered during BofA's recent rates call, where they explored the implications of a volatile commodity market for US inflation metrics and potential future rate adjustments by the Federal Reserve. Given the current trajectory of inflation expectations, traders would be wise to remain vigilant.
Supporting this view, the recent US CPI data—along with analyst expectations—could indicate a shift in market behavior, particularly if inflation fails to stabilize. Substantial fluctuations in commodity prices have historically resulted in significant adjustments within the yield curves, which, in turn, will likely influence USD valuation going forward. Thus, understanding these moving parts is essential as the landscape evolves.
Where it sits in our coverage
As per our consensus target for the USD trajectory, we note a range of targets as set by major firms: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's positioning on the implications of rising inflation aligns with jpmorgan, which reflects a more optimistic view regarding the dollar's strength at a higher target. In contrast, bofa expresses a more cautious stance that sits at the lower end of the spectrum, suggesting a potential divergence in outlook.
How other firms see it
Similar sentiments are echoed among aligned firms like jpmorgan, reinforcing the idea that rising inflation will bolster USD strength over the medium term. On the contrary, firms like bofa forecast a potentially weaker dollar as inflation concerns materialize without adequate yield support.
Traders should consider how these inflation dynamics may play into the USD/CAD and USD/JPY currency pairs, particularly as commodity prices gather momentum and central banks respond to inflationary pressures.
01Inflation risks are escalating, prompting a proactive positioning stance for traders.
02The CPI preview signifies important market adjustments that traders must monitor.
03Commodity price fluctuations are a key driver for upcoming interest rate adjustments.
04A divergence exists among firms regarding USD's trajectory in the face of inflation.
Market implications
Watch for fluctuations in the USD/CAD and USD/JPY pairs as markets adjust to inflationary pressures that stem from commodity price movements. The upcoming CPI data release will serve as a critical benchmark for assessing market expectations ahead of any potential Fed actions.
Risks to this view
A reversal could occur if upcoming CPI data comes in significantly lower than market expectations, easing inflation concerns and leading to a stronger positioning for a dovish Fed response. Additionally, any sudden shifts in global commodity prices could undermine current pricing expectations and USD strength.
Hello, and welcome to Global Research Unlocked, the interest rate in FX series. This podcast is based on our weekly client conference call, where our strategists, along with guests from other parts of Bank of America Global Research, discuss the most topical and pressing questions faced by our market. I'm Mark Cabana, co-head of U.S. rates strategy at B of A Securities.
Today is July the 10th, and we're going to discuss concerns around the recent commodity price increase as a result of higher geopolitical tensions, and we're going to focus on a very important U.S. inflation trend next week, the CPI, and we're going to talk about the implications that that has for the rate outlook. As a housekeeping item, a reminder that any conflict disclosures for securities mentioned on this call can be found on the conference call invitation. With me today to discuss these mounting inflation concerns and the key focus on CPI next week is Sfia Salim, co-head of Global Rate Strategy, Stephen Juneau, senior U.S. economist, and Megan Swiber, a senior rate strategist.
So this week, we clearly saw that global rates rose and curves modestly bear flattened. The move was driven by reawakened geopolitical concerns, higher oil, and the associated inflation risks. It also occurred in the context of this very important inflation report we're going to get next week, which is really seen as critical for the pricing of the July FOMC meeting.
So to dive into this in a little bit more detail, I wanted to first bring in Sfia. I wanted to ask you what your impression of the global rate reaction was to the increased geopolitical risks and higher oil. Anything in particular stand out to you?
Yes. Hi, Mark. Hello, everyone.
Two things I would say to note. The first is the larger volatility experienced in euro and U.K. rates, in particular relative to the U.S. and in the front end of the curve. To us, that's another example, again, of the type of reaction we've seen since the Iran war started, which is one whereby the euro and U.K. markets seem to be a lot more sensitive to oil moves than other regions.
It comes from probably two reasons. First, positioning. I think over the last few weeks, in general, our client interaction suggested there was appetite for long positioning in the front end of those two markets.
So there was growing uncertainty around the possibility of another ECB hike. And in fact, we received quite a lot of pushback on our call that ECB will deliver another hike in September. And therefore, this longer positioning probably explained part of the larger selloff that was experienced as oil price increased.
But I think the other element as well, which is probably what dominated price action since the Iran war started, is the fact that the ECB and BOE are still considered to be central banks that are most focused on inflation risks. And therefore, the market is quicker to adjust its expectations around these two central banks in an oil rally, but also quicker to fade the pricing of hikes when oil comes down, which was what happened as well on yesterday. The second thing that stood out to us is the fact that in euro, there was limited flattening in two years, 10 years in the selloff, but a larger flattening really in the back end of European government bond curves.
So that's really a key indication of the strength in the demand that can emerge in long dated government bonds at attractive yield levels. 30-year OATs reached their highest level since 2008 earlier this week, and that was certainly an element that triggered demand, but there was in general broad demand in the back end of all curves. It really confirms also the data we've looked at for Q1, which show significant buying by European life insurers, as well as good buying from pension funds in euro area. In fact, European insurers added the most debt securities to their portfolios in Q1, the most of the past nine years, really, on a quarterly basis.
So we think this appetite will remain in place, and that will be something that continues to provide a backstop for long dated yields in euro area. Great. Thank you.
So given the moves in oil and given the questions about what it means for inflation, how do you think that this impacts global central banks and the pricing of them, especially for the ECB and the BOE? Yes, I think that overall, we're likely to continue to see a bit of volatility in the front end of the markets. We do think that the higher oil now makes it clearly more likely that the ECB will deliver this additional hike in September.
We think that it will be hard to deliver more than one hike, even if the market is pricing 40 basis points or so now in total, but it is also a bit early in our view to fade those 40 basis points of hikes, given that any additional rally in oil, we can get further front end sell-offs. But clearly, yes, it anchors in, I would say, this added ECB hike. For the BOE, our baseline view is that there will not be any rate hikes, and in fact, the next move may be a cut at the end of 2027.
But if oil were to rally again, it could really increase the risk of one hike being delivered towards the end of this year. This is something the market is pricing. I would say at this stage, we tend to be biased to fade this current market pricing.
Great, thank you. What are the big client questions you're getting, given the renewed volatility at the front end of rates curves and questions about the geopolitical backdrop? In general, I would say that the questions on the euro side were focused on the possibility of more than one hike from the ECB, because with the market, as I said, pricing in 40 basis points, there was some temptation from investors to add two long positions in the front end and fade this front end sell-off.
But beyond that, I think the focus is now really turning to curves and the possibility for this renewed escalation to challenge the typical carry trades that are put on over the summer. So that includes long-end forward steepeners, but it includes also long position in periphery spreads and semi-core spreads. The question is focused on that, and our view when it comes to long-end of the curve, it makes sense to be cautious and, as I said, to acknowledge the strength in demand that could indeed challenge those forward steepeners in the summer.
Two other sources of questions, I would say, independently from the geopolitical tension, it's a bit more on the political side and on the technical side, so on politics, more questions on France, given the renewed attentions on the upcoming elections with Le Pen announcing its candidacy now for the French presidency, and also the renewed focus on budgetary situation with the French government, mentioning that it will be difficult to stick to the 5% deficit target. So this is attracting attention because positioning in OECD has been long ahead of the summer as carry trade. The other technical element is really around seasonality, because there are typically quite strong seasonal patterns in July, notably rally in boons, flattening in 2010s, and rally in forward real rates.
Clients are wondering whether the geopolitical tensions could challenge those typical seasonality patterns. Great. Thank you.
Okay, now let's transition to the US and CPI next week and the associated potential implications for the Fed as well as market pricing. Let's start with Stephen. Stephen, you had your CPI forecast out recently.
What are you looking for and how do you see the balance of risks around your forecast? Yes, so we're looking for a relatively strong print, not on the headline. So we're expecting headline will fall by about a tenth of a percent on a month over month basis.
There's been some mention of the fact that gasoline prices have come down by about 10% on non-feasibly adjusted basis in June. Obviously with the moves in oil prices that we've seen recently, maybe that decline might not continue into the coming months, but still the relative decline from where we were just a couple of months ago does probably present further downside to energy prices. So consumers should get some relief at the pump in the form of lower headline inflation, and they probably experienced that in June, which obviously helps spending in terms of real terms.
While we're expecting a decline in headline, what we're looking for in core is a relatively firm print. We're expecting core CPI to increase by 0.3% month over month, 28 basis points on an unrounded basis. And that's really a reflection of our expectation that you're going to see World Cup related demand spill into higher price hikes for things like lodging, things like airfares, even car rentals, even admissions to sporting events.
So you'll get some kind of temporary inflation in the month of June due to the World Cup effect that should fade over the coming months, all that being said. Also I would say is that in terms of other details, we're expecting motor vehicle insurance just not to be as big of a drag as it was in the prior month. So that also boosts core services ex-housing.
So it's a report that looks good on the surface in the form of a decline in headline inflation. But the issue is when you look under the hood for the Fed, that you're probably looking at sticky core services ex-housing inflation. And that's something that they're really focusing on right now, given kind of the upside pressure on inflation, given the potential risks that they see on their forecast.
So it does keep this hawkish bias in play if our forecast does prove to be right. In terms of the risk around our forecast, I would say talking with people and looking at the market pricing, where fixed things are right now, the risk to our forecast at least seems to be to the downside. We seem to be on the higher end of consensus.
We're above market pricing. Some of that I think is just due to uncertainty about what this World Cup impact will actually be. There's a lot of kind of different reports on there.
But when we look at the STR data, the hotel industry's data, we see a pretty significant increase in average daily room rates. So we do think there's some impulse and demand. And also when we look at our own internal data from our institute, from our credit and debit card holders, we do see increased spending across host cities, right?
So we do think there's a demand impulse coming from the World Cup. And if you looked at prior World Cups in Europe and France, you did see an inflationary effect in Brazil. So I wouldn't be surprised to see kind of some more upside pressure there.
That's why we kind of penciled it in. But yeah, risk in terms of market pricing suggests that we're a little bit on the high end. And that also seems to be the case when we look at some of our peers as well.
So you talked about your forecast in relation to consensus. You're a little bit higher on core. What is the client feedback then from your forecast?
And what are the frequent inflation questions that you're getting? Yeah, so it's exactly that, Mark. It's that we seem to be a little bit high on a few of these components.
And they're kind of wondering what's driving that. And I point to some of these data already that we use in terms of our forecast. And that's driving kind of our expectation for firmer kind of travel-related inflation this month than maybe what some of our clients are expecting, at least on the front end.
So just when thinking about the month ahead. Now in terms of the questions that we're getting more broadly on inflation, it's about what does it look like in the second half of the year? Obviously, the first half of inflation has been very firm.
It's one reason why the Fed has moved off its cutting bias to an on-hold bias. And even as considering kind of hiking rates at this point, at least 9 out of 18 of them are. So the question around that is, okay, well, inflation looks bad in the first half.
But what if it looks better in the second half of the year? Where do you see it going? And we do think it will look sequentially better in the second half of the year.
But the issue is that we don't think it's going to look all that great, right? We're forecasting core PCE to average about 22 basis points in the second half of this year, which is well above kind of the run rate you need to hit 2%. And we heard from Williams earlier this week, he said that if we continue to see inflation surprisingly upside run above our target, then we may need to adjust rates.
When you looked at the minutes as well, the minute said if participants didn't see improvement on inflation towards 2% soon, then it might be appropriate to hike rates as well. So even though you'll get relative improvement in our forecast of say 22 basis points in the second half of the year, well, you need 17 basis points to be consistent with 2%. So that's still going to leave you well above your target at the end of the year when you're looking at the year over year rates.
But yeah, I would say that's really the core question right now is, what does it look like in the second half of the year? And then the other question we get a lot is, how much of this inflation can we look through? How much of it is temporary in nature?
I kind of flagged that we have some World Cup inflation in our June forecast, right? That's a temporary phenomenon. That should fade out.
We know that tariffs are boosting inflation by about 60 to 70 basis points. Again, this is already showing signs of fading out when you look at sequential data, and that should continue. Iran is still a big uncertainty, as you noted at the front of the call.
But oil prices have come down substantially. So if they remain at these levels, then you're probably not going to get as much passed through either. But they have boosted prices when you look at airfares, when you look at other transportation services too.
So you're probably getting another, say, 10 to 20 basis points after that. So you can probably reasonably toss out about 80 basis points of temporary inflation. This is a famous last word from an inflation forecaster, obviously, given the experience of 2022.
But I think you can probably toss that out. But the issue is that if you toss out, say, 80 basis points from inflation, well, you're still at 2.6% on core inflation. So you're still missing your target by 60 basis points.
And that's where we think the Fed really needs to respond to that. They need to hike rates in order to finally drive inflation down to 2% because they have been missing it for so long. Great.
I wanted to ask you about implications for the Fed. You already touched on that. But just very briefly, any other color you would want to share on how you're thinking around the Fed?
Obviously, the U.S. econ call for three hikes this year is out of consensus. I still am very supportive of it personally. But anything else that you would want to flag around that?
Yeah, I think just one last thing, thinking kind of more near term. When we do our PC translation based on our CPI forecast, based on some forecast of the PPI components that affect PC inflation, we expect core PC to continue to run above core CPI. So we're forecasting 28 basis points on core CPI.
We expect core PC to be 29 basis points. That should leave the year-over-year rate at 3.4%. So I think all else equal, right?
Although there's going to be some idiosyncratic factors, some things they probably dismiss like portfolio management and investment advice, but all else equal, I think that probably strengthens the case for near term cuts rather than weakens it. Obviously, if the market's more correct that we get kind of a softer print, then that could go against us in that way. So that's where I think will be the thing to watch next week is what does it really mean for core PC inflation?
Are we getting something around 30 basis points? Are we getting something in the low 20s instead? And that's really going to swing market pricing in one way or the other.
But I think it's probably just unidirectional. If you get a strong enough print, it's pricing in more into July or September. But if you get a relatively soft print, I don't know if you get a ton of change.
But I'll leave it to you and Megan to comment on that because you're more of an expert in this subject than I am. Well, let's turn to Megan right now. Megan, how do you think the market will react to Steven's expected CPI forecast if it realizes?
What do you think are the implications for U.S. rates? And let me add another element to this question. This morning, Steven, you and your team just published your June retail sales forecast.
You are now calling for retail sales to be about double what the street is as far as headline is concerned, as well as ex-autos and gas, as well as in the core control group. Megan, also, if you can think about not just CPI, start there, but then add in a little bit of potential market reaction if we get this very strong retail sales print, which, by the way, our internal data is really good at leading the official sector data. So Megan, please do elaborate on that.
Sounds good, Mark. And so following the weaker than expected payrolls number that we got, we do think it's going to require a strong core CPI to really push markets and the Fed towards a July hike. The print that Steven's expecting probably keeps markets patient on a July hike, but depending on that composition, so what Steven was talking about, right, what the Fed's going to be very mindful of is that core services, ex-housing component, thinking about what the translation's going to look like through to core PCE, which, of course, is what the market pretty much does in real time as we digest the data.
Even 0.3 on core, as we're expecting, was somewhere similar on core PCE, can get the market closer to 50-50 for July. We think it's probably going to require core PCE implications coming closer to 0.35% for us to move July to more of a modal probability for the market to see markets pricing roughly 60% or more probability for July. And Mark, kind of back to all of these risks that we're talking about right now, you know, Steven mentioning that we're above market and we're comfortably above market on where we're expecting inflation to have come in in June because of that World Cup effect that we're seeing in a lot of our data, the retail sales data and what we continue to stress in a lot of our client meetings is just how strong our B of A card data is, both from a spending perspective but also what we're seeing in terms of deposit bases, what we're seeing in terms of wage increases, at least their proxy of that, it still just supports this narrative that we've seen for several years now of U.S. exceptionalism and the U.S. consumer that really is the engine of the U.S. economy.
And from a lot of our client conversations, Mark, and I know you probably feel similarly, there's a lot of complacency on this story. Still a number of folks, and I'd say we get a tremendous amount of pushback on our Fed call who really just still don't think that Warsh is going to be able to deliver on hikes. And certainly we are taking the opposite argument on that, think that Warsh doesn't want to own this inflation issue, wants to get ahead of it.
And what we saw from the minutes, you have more FOMC participants that see financial conditions easy versus the number of FOMC participants that see financial conditions as restrictive enough right now. So our view still definitely argues for more of this underweight bias across the curve, but specifically in the front end, and we're of the view that the data in the coming week is going to support that view as well. Great.
And certainly retail sales would help with that. Now, in our weekly out this morning, you had discussed some of the history of market pricing and Fed hikes. We're getting a lot of these questions right now because the market is saying, you know, has the Fed ever hiked without a certain amount of pricing going into a meeting?
What did your refresh of that data tell you? Yeah. And, you know, this is all very relevant, especially in the context of Warsh suggesting that the July meeting is going to be this family fight.
And the way that we framed it in the weekly is that we think that the Fed's more inclined to favor family tradition and not surprise the market with an underpriced hike. What we see in a lot of this data, right, is that pricing typically evolves much more definitively as we move closer to the meeting. If you're looking at what the distribution looks like two weeks ahead of the meeting is what we'll see following inflation data next week versus as we evolve into one day before the meeting there, there can be some pretty decent swings and market pricing really just ahead of the meeting tends to be very close with what the Fed ends up delivering on.
But historically, two weeks ahead of the meeting, the Fed has only delivered a hawkish two to five basis point surprise versus pricing less than 20 percent of the time and a five to 10 basis point surprise versus what the market's pricing less than 10 percent of the time. So this overall suggests that we would need to see the market pricing near 80 percent of a July hike post the inflation data for the Fed to deliver on a hike. And the Fed has almost never surprised on the hawkish side of a 50-50 pricing outcome two weeks before the meeting.
So very unlikely that if Fed hikes are viewed by the market as much more of a toss up, you really need the data to get the market much more convinced for for the Fed to be delivering on a hike. Now, how do we get to 80 percent pricing? It probably requires a minimum of that strong inflation print next week.
So thinking more like zero point three five percent in terms of implications for for core PCE, maybe need to see continued risks of higher oil prices. And then, Mark, as we're discussing more of this risk that retail sales comes in quite strong and is more in line with what we're seeing from from overall consumer data. Of course, we're also going to get Humphrey Hawkins testimony next week.
Not expecting much forward guidance, of course, from Morrish on that for the July meeting, but of course, going to be a focal point for the market in terms of getting any sense of how he's assessing inflation risks and where policy restrictiveness is considering financial conditions right now. And Steven, just wanted to ask you a bit here, too. We did see the Fed Task Force leadership announced this week.
Any big takeaways there or market implications? Yeah, I mean, I don't know about market implications yet, right, because we don't really know what these task force will conclude. If anything, right, the selections make the kind of conclusions more more uncertain because the roster that Morrish has kind of assembled for this task force is really impressive.
They've kind of stacked each task force with with these five star economists, and they're going to do their research, right? They're going to take their time, they're going to compile their staff and and kind of do their best effort on each of these, right? So I don't think there's a foregone conclusion already set up.
So we can't kind of guess what the market implications are. But what I think we did learn is that Morrish is taking these seriously, right? The new chair, he's really focusing on these, he really views this as an opportunity to shake up how the Fed does things and how they think.
And he's added a lot of credibility to these task force, I think, with its selections. He's not staffing people with who you think have kind of clear views in one direction or the other, right? There are people with varying views, varying opinions, strong opinions.
So I think that's good. I think it lends a lot of credibility to the institutions, to the task force, to the work that they do. And what it will probably help Warshot with once the task force do conclude their research is it will help him convince the committee of their findings, right?
Because it does have so much credibility about who's working with it. So I'm sure he'll get more buy-in from the FOMC on these potential changes because of who is leading these task force. So we'll have to see what the conclusions are right now.
I think it's anyone's guess, but I do think they've got a lot of credibility behind them with who he's picked. Great question. That concludes, I think, everything that we wanted to discuss.
Thanks for joining us today. We hope you found this useful and that you'll tune in next week. Bank of America and B of A Securities are the marketing names for the global banking businesses and global markets businesses, which includes B of A Global Research of Bank of America Corporation, Lending Derivatives and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America N.A., member FDIC, Securities Trading Research Strategic Advisory and other investment banking and markets activities are performed globally by affiliates of Bank of America Corporation, including in the United States B of A Securities Inc., a registered broker dealer and member of FINRA and SIPC, and in other jurisdictions by locally registered entities, Copyright 2026 Bank of America Corporation, All Rights Reserved.
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