Inflation expectations have dropped sharply

Some blaming leverage shakeout

Resending as some issues with the email today.

Chart of the Day

The US 5-year/5-year forward breakeven rate fell by 7 bp yesterday and, over the past week, it has fallen by 14 bp to 2.23%. This could be a sign traders’ inflation expectations have genuinely fallen, maybe due to the declines in some commodity prices likes agricultural and lumber, or it could be due to signs that the Fed will is now starting of thinking about tapering its asset purchases. Yet some have also argued the move is because of the leverage shakeup in the past week, which was seen various parts of the market perform poorly. The logic is that, because betting on rising breakeven inflation rates was a crowded trade, the shakeup has caused many to reduce their positions to meet margin calls, which has therefore pushed yields back down again. If that is the case, then inflation expectations will probably rise again before long.

Macro

US initial jobless claims fell to 444,000 last week, but continuing claims unexpectedly increased to 3.8mn in the week before.

The Philly Fed manufacturing survey disappointed, falling to 31.5 in May, which is potentially a sign of supply constraints weighing on output.

If you want a more positive indicator though, check out the latest US conference board leading indicator.

In South Africa, the central bank kept its policy rate unchanged at 3.5% yesterday. Unlike some EMs, it does not seem to be facing the same pressures to tighten policy, with the rand now back to its pre-Covid level.

Markets

It was a decent rebound for the crpytos, though they still have some way to claw back their losses.

It was risk-on once more in the equity markets, or at least those in Europe and the US.

The Russell 2000 is still underperforming the Nasdaq though, not normally a good sign for the economy.

A selection of assets that typify risk-on trades has fallen by 0.4% in the past week while a selection that typify risk-off trades has risen 0.8%. The latter mainly reflects the rise in gold.

The rise in gold prices in the past week has pushed the copper/gold ratio down, though it would still normally be consistent with a higher 10-year bond yield.

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