YoY inflation will most likely come down due to lower fuel prices – with consensus for 8.8% YoY. Yet core inflation is expected to rise to 6.1% YoY from 5.9%. While the focus in markets is on YoY inflation figures, the Fed is keeping an eye on month-over-month inflation figures and wants to see multiple months of decelerating price growth before making a clear dovish tilt. We are not there yet and given broadening price pressures, we could still be in line for positive inflation surprises even with YoY figures coming down. Even if inflation starts to come down, the Fed will likely want to keep financial conditions tight for a prolonged period to make sure price pressures do not emerge again. Thus, we are still not at the point for a dovish tilt from the Fed and the current market pricing for several rate cuts in 2023 is unlikely to happen, in our view.
The recession fear moves have been especially clear in US 10Y rates, which have fall at most nearly 100bp since mid-June. A combination of softer global macro data, thin summer liquidity and risk-off due to geopolitical tensions (eg Pelosi's visit to Taiwan) have sent long-term rates sharply down. Still, the notion that inflation will come sharply down in the months to come and central banks to cut rates next year due to softening growth seems too optimistic. If anything, we are inclined to think that long-term rates will rise back up again after the summer, in part because QT will take its full strength from September after the three-month gradual phasing in period is over. - Nordea
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