Despite a downside surprise in CPI, the Fed's preferred inflation gauge, Core PCE, is still rising. This growing negative wedge between the two metrics leads to a more hawkish Fed policy than CPI alone would suggest, creating a negative outlook for TIPS in the near term.
US inflation breakevens are screening as 1-3 standard deviations cheap compared to commodity prices, one of the cheapest levels in seven years. However, a catalyst is absent before the July FOMC meeting due to hawkish Fed communications, suggesting the attractive entry point will emerge after this event.
While energy shocks drive European front-end inflation, the key driver has changed. The sensitivity of inflation swaps to oil prices has faded significantly, while sensitivity to natural gas prices has picked up, making TTF gas a more critical indicator than Brent crude for European inflation expectations.
The spread between five-year, five-year French inflation (FCPI) and Eurozone inflation (HICP) has tightened to a 10-year low near -5 basis points. This is attributed to technical flow weakness rather than fundamentals, creating a potential opportunity for the spread to widen back towards positive territory.
Analysts are constructive on UK 10-year real yields, seeing potential for them to rally 25-30 basis points. This is based on attractive valuations relative to nominal yields, limited scope for a sell-off in front-end yields, and long-term UK trend growth being unlikely to exceed 1%, anchoring real yields lower.