Earnings Call, Conference Presentation, Interview, Fireside Chat
Inflation and the inflation markets
- Global energy prices driven by the Iran conflict are projected to peak within the next one to two months, with price increases expected to gradually pass through to core inflation over a three-month period, resulting in sticky high inflation across the U.S. and Euro area for the remainder of the current year.
- U.S. inflation is forecast to remain elevated with a mid-2% target not reached until the second half of next year, prompting the Federal Reserve to maintain current rates until that timeframe before implementing 50 basis points of cuts to reach an estimated long-run level of 3.125%.
- Euro area headline inflation is expected to peak at approximately 3.3% in the third quarter of this year before falling below 2% in the second quarter of next year, while core inflation is predicted to stay above target until the end of next year.
- The Eurozone central bank is anticipated to execute two interest rate hikes of 25 basis points each in June and July 2026, with potential delays to September 2026, followed by quarterly rate cuts starting in June 2027 if core inflation peaks and stabilizes.
- UK headline inflation is forecast to reach a revised peak of 3.7% in the fourth quarter of this year, with the April print representing the recent low point as prices rise on energy costs and volatile components like airfares.
- UK inflation is expected to dip slightly below the target level in the second half of next year due to lower gas prices, while the Bank of England may delay rate hikes from June to July or September if it chooses to look through temporary inflation increases.
- Market positioning has shifted from long duration and gold assets to short duration and short rates due to resilient U.S. consumer data, though long-risk assets remain over-exposed and vulnerable to equity market sentiment.
- One-year inflation swaps show high sensitivity to oil prices, while inflation forwards for periods up to three years behave as risk assets, and the five-year, five-year inflation measure remains anchored despite geopolitical tensions.
- Tail risks regarding prolonged conflict, supply chain disruptions, and oil price volatility are currently underpriced, with one-year inflation forwards for the UK showing less persistence (8 basis points) compared to the US (26 basis points) and Europe (46 basis points).
- A significant supply shock is not expected to replicate the 2022 inflation surge due to differing demand-side factors and labor market dynamics, and the new Fed Chair faces challenges in convincing the committee to cut rates in the second half of this year without weak labor data.
- Five-year real rates in the Eurozone are anticipated to decline through the summer as current levels of 92 basis points are considered too high, supporting a structurally bullish outlook for European bond markets.
- The ECB's tightening cycle is capped at two hikes this year, with the central bank needing clear evidence of no second-round effects to initiate rate cuts below 2% in mid-2027, contingent on a decline in two interest rate hikes from the 2026 plan if surprised by downside data.