Rates Spark: US inflation likely too hot for comfort

Lower oil doesn’t have as strong an impact on rates as a few months ago Risk sentiment improved a tad on Monday, helped by oil easing lower and a recovery in AI stocks. But the bid for duration seems to stick and most global 10yr rates managed to tick a few bp lower. Flows data from the last few weeks already reflected increased demand for longer-dated bonds, even before the AI jitters started. Concerns about stretched equity prices can further feed the relative value play whereby a 10yr UST yield of around 5% could look attractive.

Having said that, we still warn about the upside risks to rates in the near term. Markets are constantly rotating their attention between AI and inflation concerns, keeping volatility high. Next up is the US CPI number, which consensus still sees coming in hot at 0.3% MoM for the headline figure. Our economist also expects the core reading to come in at 0.3%, which does not look good on an annualised basis.

Brent oil ticking closer to $90 per barrel helps ease inflation risks but doesn’t remove the upside risks. Rates were much more sensitive to oil prices a few months ago, but the correlation has diminished significantly. The damage has been done in terms of higher energy costs, and the focus is rotating towards potential second-round effects. So, whilst lower oil prices take off some of the pressure from rates, inflation data has become increasingly important.

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