Earnings Call, Conference Presentation
MOU-nting inflation concerns
- Global interest rates may experience continued volatility in the front end of the markets, with the European Central Bank (ECB) likely to deliver one additional rate hike in September, potentially totaling 40 basis points, though further hikes beyond that are considered unlikely.
- The Bank of England is not expected to deliver rate hikes in the near term, with a potential cut possibly occurring at the end of 2027, although a further rally in oil prices could increase the risk of a hike later this year.
- Geopolitical escalation and tensions are expected to challenge typical July seasonality patterns and potentially disrupt summer carry trades, while a renewed geopolitical focus may impact the typical rally in bonds and forward real rates.
- Demand for long-dated government bonds in the Euro area is expected to remain steady, driven by European life insurers and pension funds maintaining their appetite for debt securities.
- France's budgetary situation faces continued scrutiny regarding the government's ability to stick to the five percent deficit target.
- Headline inflation is expected to fall by approximately one-tenth of a percent month-over-month in June, driven by lower gasoline prices, though further downside is probable despite the recent decline in energy costs.
- Core CPI is forecast to increase by 0.3% (28 basis points) month-over-month, with World Cup-related demand temporarily boosting prices for lodging, airfares, car rentals, and event admissions.
- Approximately 80 basis points of temporary inflation, including World Cup effects and tariff-related costs, are expected to be excluded from core inflation assessments, which will likely remain sticky and a primary focus for the Federal Reserve.
- Core PCE is projected to average about 22 basis points in the second half of the year, resulting in a year-over-year rate of 3.4% by year-end, remaining roughly 60 basis points above the 2% target even after adjusting for temporary factors.
- Inflation risks are skewed to the downside given current market pricing, yet if inflation continues to surprise to the upside or fail to improve toward the 2% target soon, the Federal Reserve may need to adjust rates or hike.
- The Federal Reserve is shifting from a cutting bias to an on-hold bias with potential for hikes, driven by strong US consumer data, easy financial conditions viewed by many FOMC participants, and a desire to get ahead of inflation issues.
- Market participants currently expect roughly 60% or more probability for a July rate hike to become the modal view, potentially requiring a strong inflation print with core PCE implications around 0.35% to push pricing to 80%.
- Continued higher oil prices are likely needed to support the case for a July hike, and a strong retail sales print would further reinforce the narrative of a resilient US economy.
- New Federal Reserve task forces will take time to conduct thorough research, but their credible leadership is expected to influence the institution's operation and help the Chair convince the FOMC of findings without immediate forward guidance on the July meeting.