It’s all about the dots and spots.
Key points
- The stronger US CPI report highlighted that inflationary pressures are taking time to subside.
- We continue to suggest that neutral interest rates in the US may be much higher than many believe.
- In the Eurozone, monetary policy rhetoric is growing more dovish, and we expect rate cuts starting in June.
- The spotlight remains on Japan, where we think that a March hike from the BoJ is likely.
US yields rose this week, following a stronger US CPI report, which highlighted that inflationary pressures are taking time to subside. Core inflation currently stands at 3.8% on a year-over-year basis and were you to annualise numbers for the last 3 or 6 months of data, then the picture is not particularly different, at 4.2% and 3.9% respectively.
Last week, Fed Chair Powell suggested that rate cuts are not ‘far away’ and this provided encouragement to bond bulls. However, we expect that next week’s FOMC meeting will deliver a message that more patience will be required, before policy easing can commence. In a sense, it seems difficult to imagine that Powell will sound more dovish at a time when economic data remain robust and risk assets are trading at their highs.