Is secular stagnation a thing of the past?

Crude oil prices declined in July, confirming the trend under way since mid-May. Over the longer run, Brent remains on the uptrend that set in back at the start of 2016. The yield for the 10-year Bund rose by around 15bp last month, the yield for the 10-year TNote by around 11bp. In the US, headline inflation accelerated to 2.9%, its highest level since 2012, while core inflation clambered to 2.3%. Headline inflation also picked up in the Eurozone, reaching 2.1%, core inflation coming in at 1.1%. Equity markets were in fine fettle in July, the EuroStoxx  50 appreciating by 5%, the S&P 500 by 3.5%. Overall, therefore, the determinants of breakeven inflation rates were rather upbeat. And yet, linkers did not benefit from the favourable environment, nor from the heightened trade tensions between the US and China. Breakeven for the 10-year Bund€i , which had lost as much as 10bp, went on to recover slightly, reaching 1.30% at the month-end. Breakeven for the 10-year TIPS shed as much as 6bp before recovering and bouncing back to 2.12%. In other words, markets still do not expect a more pronounced acceleration in inflation. Breakeven for the 10-year Bund€i remains at historically low levels. The 5Y5Y inflation forward has hardly budged since the start of the year, fluctuating within a narrow range around 1.7%. The US 5Y5Y inflation forward is stable, even on a slight downtrend since March, and currently sits at 2.4%. Before the financial crisis, it often exceeded 3%. There are two possible explanations as to why inflation expectations remain contained. First, central banks are falling over backwards to keep inflation expectations in check. The second is that the risk of secular stagnation has not vanished, notwithstanding the aggressive pro-growth policy pursued by Donald Trump. What is certain is that the first explanation does not bear up to scrutiny: everywhere, even in the US, monetary policies remain exceptionally accommodating. Central banks like the Bank of Japan and, to a lesser extent, the European Central Bank still have as objective to reflate their economy.