Inflation/Deflation
In this Special Report, we introduce our Euro Inflation-Linked Golden Rule – a framework to profitably trade and invest in Euro Area inflation-linked bonds versus nominals. The Rule is currently signaling that nominal government bonds should outperform inflation-linked bonds over the next year as disinflation in the Euro Area continues.
The latest edition of our Big Bank Beige Book suggests the expansion remains intact, though weakness in C’s private-label credit card portfolio could be a harbinger of distress among lower-income consumers. We remain tactically neutral with a bias to turn defensive once clearer signs of a recession emerge.
Our latest views on the recent increase in Treasury yields and some key things to watch at next week’s FOMC meeting.
The UK labor market remains far too tight to expect wage growth to slow to levels consistent with the Bank of England inflation target. A true recession with rising unemployment is needed to finally slay the UK inflation beast. 2024 rate cuts are off the table, with the central bank having to keep monetary policy tighter for longer than markets expect and the UK economy now rebounding. We recommend downgrading UK gilts to underweight in global bond portfolios, while also looking for opportunities to buy the British pound on pullbacks versus the euro, Canadian dollar and Swedish krona.
