Rates Spark: Watch Inflation Expectations Drift Higher

Softer US macro data is providing some relief to rates, but Euro inflation swaps are drifting higher due to lingering geopolitical conflict. ING suggests that while inflation risks persist, the ECB's focus on downside growth risks makes aggressive hiking unlikely.

Key Takeaways

• 1.Softer US economic data like the core PCE deflator and GDP revisions are starting to alleviate some upward pressure on rates.
• 2.Euro inflation swaps are drifting higher by approximately 1bp per day since the start of the Middle East conflict, even accounting for oil price changes.
• 3.The ECB is unlikely to pursue an aggressive hiking cycle because of significant downside risks to the growth outlook.

Table of Contents

• Softer US macro data should increasingly see more attention
• All else equal, euro inflation swaps are drifting higher
• A simple model suggests a c.1bp increase in 2Y EUR inflation swaps for every day the conflict lingers
• Friday's events and market view.
• Author
• Disclaimer

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