Rates Spark: Oil Losing Control

(MENAFN- ING) Hot US inflation and still robust growth are adding upward pressure to global rates

Geopolitics and oil prices are still a source of volatility for rates. But following the ratchet higher in rates on the back of the US jobs report, long-end rates have become stickier at their elevated levels even as oil briefly dipped towards US$90/bbl on Tuesday.

It might be just a growing numbness to the news cycle of supposed deals and renewed conflicts. Shortly after oil hit new lows, headlines of both Iran and US attacks pushed prices back up. But keep in mind that US rates – especially real rates – have been doing their own thing for a while given the resilient backdrop in both the macro data and risk assets overall. A hawkish repricing of the Fed has been the result, and if we look at the upcoming CPI that is set to show a headline inflation print above 4%, it strengthens the case for the hawks.

There might still be arguments to look through this inflation print, which could well mark a peak. But for now, the market has to work with the data at hand, which still points in a bearish direction. And as for longer EUR rates, they cannot withdraw themselves from spillover pressures forever.

With central banks turning more hawkish and CPI data unlikely to appease inflation concerns in the near term, a more bullish tilt to rates might have to come from concerns about growth. Higher energy costs and a tightening of financial conditions should start to weigh on the economic outlook over the medium term. But this risk seems to be largely ignored by markets. Whilst in our baseline we think growth should hold up, the balance of risk is clearly tilted to the downside. Therefore, we think markets will face resistance to price ever more hawkish monetary policy paths. At some point, growth risks should take over from inflation risks.

Wednesday's events and market views

The US will release US CPI data for May. Expectations are for the headline inflation rate to accelerate to 4.2% year-on-year and the core rate to nudge up to 2.9% YoY. The only other noteworthy release is the US federal budget balance.

One focus will be the still busy primary market, where we have already seen a slate of syndicated deals from sovereigns and SSAs this week, among others, Italy and the EU. Greece has announced a syndicated tap of its 10y bond, which should be Wednesday's business. Regular auction supply will come from Portugal, which reopens bonds in the 10y and 20y areas (€1-1.25bn), as well as Germany, which taps its 10y benchmark (€5bn). Later in the day, the US Treasury sells US$39bn in 10y notes.

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