US break-evens look too complacent. 1Y and 2Y break-evens have pushed lower following milder CPI and PPI prints last week and now stand at 1.16 and 1.92% respectively. In the initial phase of the US-Iran conflict, break-evens did rise alongside oil, but have been grinding lower over the past few months. Directionally, breakevens have even decoupled from the recent bounce in oil prices. We think break-evens are mis-priced. The gross value of refined petroleum products are approaching the highs seen in May / June as crack spreads widen even amidst lowish crude oil prices. The climb over the past couple of weeks should translate into higher end prices for consumers and show up in July’s inflation numbers.
We also find it odd that US break-evens have dropped more than the other DM counterparts. Across the six DM economies that we track, only the US showed a dip. The others show a modest rise, which is consistent with some lingering effects from the US-Iran war. Moreover, the US economy seems to be on a firmer footing within the DM space. Accordingly, we think breakevens may be under-pricing inflation risks and nominal yields are perhaps more cognizant of these risks and are remaining buoyant.
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