📝 See Potential Adjustment In Fed Pricing: UBS Strategy

Financial markets are now far less fearful of inflation than central banks. That suggests the central banks are still three or four months behind the market narrative. Just as central banks hit maximum hawkishness, the markets have priced inflation back down and are now far more concerned about economic growth.

The US 5y5y inflation forward is 2.48%, down from 2.80% a month ago and now actually a fraction below the high it reached in mid-2018 at the peak of the government's fiscal stimulus.

What needs to happen now is an adjustment in Fed pricing. With forwards back in line with a 2% inflation target (the 5y5y breakeven is 2.04%), the market still looks a little punchy on the Fed - Q1 2024 implied is around 2.75%1 still 25bp above the peak of the last cycle and 25bp on the restrictive side of the neutral rate. - UBS Strategy