INFLATION

INFLATION LINKED BOND

The direction of TIPS yields is primarily driven by expectations for Fed rates (proxied in the chart below using Fed funds futures).

 In the near term, it’s possible a risk off phase in markets (which probably eventually prompts the Fed to pause/delay plans to keep raising rates)

According to LongView’s analist – we’re not, at this stage, expecting much higher inflation (in the US or globally)…. Four key points below worth thinking about in that respect:

i.                    The Fed (& PBoC) have significantly tightened policy in the past 12 – 18 months and there’s growing evidence of a fading credit (and inflationary) impulse. E.g. see slowing money supply in the US as well as EZ & China.

ii.                 The outlook for the USD is strong (i.e. ultimately deflationary for the US economy). Hopefully you’ve seen our recent LV on Friday pieces which have examined this in detail…

iii.               Most of the recent increase in US inflation is driven by external factors (i.e. a weaker US dollar and higher commodity prices – hence rising goods inflation). Service sector inflation, though, has been relatively subdued (see chart below).

iv.                There’s probably more slack in the US labour market than many think (I attach a global wage inflation piece which gives some more flavour on this).