Inflation expectations, as proxied by 10Y breakevens, are mixed across the developed markets (DM). These are a function of several variables including actual CPI trajectory, the resolve of their respective central banks in curtailing inflation and economic conditions (we will get a further sense for the US with ADP and JOLTs data due tonight). In general, inflation worries have receded from six months ago. This makes sense intuitively as major central banks had barely begun to tighten monetary policy in 2Q. Following multiple jumbo hikes, some impact is materializing. In the US and Canada, there are signs of strains in the property market even if the impact on the labour market is not as clear just yet. With these two central banks amongst the most aggressive amongst the DM, their government bond curves are deeply inverted.
Conversely, the BOJ and RBA are on the dovish side. The RBA was late to the tightening cycle and one of the earliest to pivot to a slower pace of hikes. With just 275bps of hikes this year, compared to the Fed’s 375bps, the market is not convinced that the RBA is as serious about curbing inflation. Unsurprisingly, the AGB curve is still upward sloping as investors maintain an inflation premium. Meanwhile, the BOJ is the key outlier with Governor Kuroda steadfast in keeping YCC even as inflation pushes to 3.8% YoY in October. While the yen has strengthened versus the USD over the past few weeks, this has not reined in inflation expectations. The upshot is that while inflation expectations tend to be highly correlated to global factors there are nuances from the respective central bank actions.
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