Inflation

In this screener report, we explore opportunities in Inflation risk, supply-constrained Information Technology stocks, and old-economy cyclicals.

The April CPI report showed clear evidence of the direct effect of higher oil prices on inflation but, so far, limited evidence of passthrough to core.

The tenuous ceasefire holds, with the "new geopolitical equilibrium scenario" remaining in place. Enough crude trickles through Hormuz to avert a global recession, but not to alleviate building inflationary pressures, a product of a complicated geomacro context that is not transitory. The Fed will look to ignore these in the short term, fueling the equity rally in the US. Chinese equities may pop thanks to the upcoming détente. When does it all end? Beware of major IPOs! 

In the US, the oil shock’s impact is more inflationary than recessionary but in the other economies, like the UK, the impact is both inflationary and recessionary. This creates relative value opportunities for bond investors. Plus, we reiterate short AUD/JPY as a trade.

We do not expect the oil shock to have a lasting effect on inflation. Looking further out, a variety of structural forces will influence inflation, including fiscal policy, globalization, demographics, and AI.

In this Special Report, we describe how inflation expectations are formed. We then demonstrate that steady state inflation expectations have un-anchored in the UK, are un-anchoring in Japan, and are at high risk of un-anchoring in the US. And we conclude with some implications for bond markets.

Volatility is high, but the path for yields is clearer than it looks. Across three oil scenarios, we show how policy responses shape fixed income markets and why the balance of risks still points to lower yields.