A significant disconnect is emerging between Fed policy and inflation data. The Federal Reserve is signaling a dovish shift, prioritizing labor market risks and viewing inflation as transitory, even as forecasts show both headline and core inflation accelerating into the fourth quarter.
Ongoing political pressure, including attempts to remove a governor and uncertainty over the next Fed Chair, is perceived as a threat to the Federal Reserve's independence. This political risk is a key factor leading to the view that inflation break-evens are too low and their risks are skewed to the upside.
Despite significant political events like confidence votes, the French inflation-linked bond (linker) market shows minimal reaction. Analysis indicates these markets are primarily influenced by supply-demand fundamentals rather than idiosyncratic French political dynamics, a counter-intuitive finding for sovereign debt.