ab12 February 2024Global Research and Evidence LabGlobal Inflation StrategyGlobal Inflation MondayLong breakevens on risk momentum in a high stakes week Inflation pressure means either higher breakevens or real rates: central bank attention largely determines which and policymakers have not been validating market optimism on rates this week. January CPI in the US and the UK might shift that, but the pipeline pressures that drive inflation models won't come quickly. Despite the more challenging environment for real rates, we stay long while emphasising that real rates are ideally balanced with an overweight in breakevens. For global breakevens, momentum in risk sentiment is enough to keep a long bias because breakevens tend to lag. Our main expressions are long US 5y CPI against UK RPI or on the US CPI curve against 10y. We close cross-market recommendations to be long EUR 5y5y HICPx vs US CPI and long UK rates against US. As a new trade idea we suggest looking at fading the steepening in the RPI curve through 5y5y/10y20y.Figure 1: View SummaryviewexpressionsUSBreakevenLong short-end breakevensBreakeven flattening- 5s10s CPI flatteners- 5y CPI vs 5y UK RPIReal rateLongReal rate steepening- Long 2y CPI and long 2y nominal rate 3:1 IE01:PV01- 5s10s CPI flatteners vs 5s10s nominal swaps steepenersEuro AreaBreakevenLong- Outright in tenors shorter than 10y- Sell short-end French linkers on b/e or iotaReal rateSteepening- 2s10sCountriesLong Periphery- Spain 15y vs France in breakeven or iota (or real yield)UKBreakevenFlattening- 5y5y/1020y flattenerReal rateLong, balanced with breakeven long5y RPI vs sonia swap 3:1 IE01:PV01Source: UBS, BloombergInflation pressure feeds back into real ratesCentral bankers have not been validating market optimism about rate cuts. Their concern is sensible, but other than the weight they put on the arguments we know well, there hasn't been much to learn about the key issues. We have touched on all of them here in the past few weeks: wages, frameworks for assessing the cyclical strength of demand, pricing power, goods-services prices rebalancing, geopolitics, surveys of firms' price expectations. Depending on how strong ongoing disinflation as measured turns out to be, a supportive enough picture from all this might be quite slow to emerge. UK and US data on Tuesday will provide a little new information on the big issue of wages. In Europe, evidence will be piecemeal and quite slow to arrive. Felix discusses the schedule in Germany here. Philip Lane shows an updated wage tracker in his speech here and speaks of the hope that firms will '[buffer] rising labour costs with a slowdown in profit growth', but unless weaker demand puts more of a dent in pricing power further, we're not optimistic.This report has been prepared by UBS AG London Branch. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES, including informat...
