Earnings Call, Conference Presentation, Fireside Chat
Global Rates & FX Views: Rates and inflation
Bank of AmericaRalf Preusser, Mark Capleton, Evelyn Herrmann, Stephen Juneau, Meghan Swiber, Evelyn Hammond, Stephen Juno, Peggy Zweiber
- September Eurozone headline inflation is projected at 3.9% year-on-year, exceeding the 3.6% Bloomberg consensus but aligning with the ECB's base case, while core inflation is anticipated to hold at 2.4% with upside risks potentially reaching 2.5%.
- Eurozone core inflation for September is expected to represent a downward surprise relative to ECB expectations, with further declines to 2.3% forecast for next year due to limited second-round effects and insufficient growth acceleration.
- Eurozone energy prices are expected to revert to base case levels by next summer, though current September forecasts remain hawkish, and economic growth is projected to lag ECB projections due to tightening financing conditions.
- The ECB base case anticipates a December interest rate hike totaling 100 basis points, with a potential third hike in March considered more likely than one in October, contingent on whether energy prices remain benign or elevated.
- If oil and gas futures pricing remains near $100 beyond winter instead of falling below $80 and €40 respectively by end-2027, a March rate hike becomes more probable; conversely, a severe scenario with oil at $130 and gas above €70 through 2027 could prompt discussion of more than four hikes despite risks to economic resilience.
- Market pricing reflects a material reduction in Eurozone inflation from peak levels, with the 1-year-1-year inflation rate at 2.22% implying a stable level slightly above 2%, alongside forward real rates estimated at 122 basis points which are viewed as excessively high relative to fundamentals.
- The European real rate curve is projected to flatten from 78 basis points currently to 10 basis points in a year's time, a trajectory deemed excessive by current market assessments.
- US PCE methodology revisions are expected to lower the year-over-year rate by approximately 20 basis points, revising the pre-revision estimate from 3.4% to a range of 3% to 4%, while underlying inflation is forecast to stay above the Fed's 2% target at an estimated 2.5% after excluding special factors.
- A 50 basis point gap in underlying inflation is expected to persist over the past year absent new supply or demand shocks, with the Fed prioritizing inflation data over labor market conditions for the October decision unless distinct signs of cooling or heating emerge.
- Uncertainty exists regarding a Fed stance change following a "very soft PCE print" in October given the Chair's aversion to being data-point dependent, while the US rates curve is expected to rise at the front end as the Fed seeks a restrictive policy rate.
- The US forward-starting real-yield curve flatteners are anticipated to remain a favorable trade mirroring the 2022 inversion, and longer-dated inflation swaps (10-year, 20-year) are expected to outperform equities and oil prices as a term premium trade in a benign inflation environment.
- Forward inflation pricing at the very long end is expected to have additional upside if the Fed hikes rates but fails to contain inflation, potentially driving higher inflation expectations over time.