Inflation, are you there?

In August, crude oil prices were one of the main determinants when it came to the behaviour of breakeven inflation rates. In the first fortnight, the price of Brent pulled back below $70/ bbl , before going on to rebound by $8/ bbl , as a result of which it neared its year’s high of $80/ bbl set back in May. Nominal long interest rates also played an important (and opposite) role, generally trending lower. The yield for the 10-year TNote , which was brushing up against the 3% mark at the start of August, eased to below 2.90% at the end of the month. The yield for the 10-year Bund eased by some 10bp to 0.35%. What is remarkable in the case of nominal long interest rates is that they are far weaker currently than they were expected to be at this time of the year in January . In the United States, in particular, there are numerous factors that could have been expected to drive up the 10-year TNote yield: the normalisation of monetary policy (see this month’s chart), the fiscal stimulus measures timed when the economy is at full employment, the deterioration in public finances, the stronger inflation, etc. And yet, this yield is still camping below 3%. The abovementioned bearish factors have been offset by bullish factors, such as the view that the US business cycle will soon come to an end and the Fed may, in a now visible horizon, start cutting its rates (implicit rates of FFs futures start to fall from the July 2020 contract on). As for the VIX, it fluctuated between 12% and 14%. Finally, inflation slowed in the Eurozone (2% in August), but accelerated in the United States (2.9% in July) and the United Kingdom (2.5% in July). Breakeven for the 10-year Bund€i therefore tracked to some extent movements in crude oil prices. It is currently at much the same level as one month ago. Breakeven for the 10-year TIPS followed much the same trajectory, save right at the end of the period. Finally, breakeven for the 10-year index-linked Gilt hovered around 3.07%. Italian linkers did not suffer as much as expected from the Italian risk, notably because of a favourable flow configuration (no issuance before September, maturing of the BTP€i 2018 which has an amount outstanding of EUR 11bn ). However, our view is that the 10-year Bund€i-BTP€i breakeven box can be expected to rise sharply before the end of the year (see Focus). Finally, the spread between the 10-year swaps on French inflation and on Eurozone inflation remained around zero basis point. At 5 years, the spread held around 7bp.