Global synchronized growth appears here with 80+% of economies and commodities producing above one-year trend growth. TIPS breakevens have habitually performed well under this scenario, including recoveries from global slowdowns.
TIPS breakevens remain cheap to expectations derived from risk assets. For example, our modeling places the 10-year near 235 bps. The big question going forward is can market-based inflation expectations keep up their strongest performance on record AND will a right-side tail show up in the outlook for headline CPI.
We are watching three items VERY closely:
- TIPS breakeven curve inversion: A lasting inversion would signal the Fed is committed to AIT and this time is indeed different.
- Inflation expectations for headline CPI > 2.5% YOY: Probabilities are rebounding toward best levels since in early 2017 and 2018.
- Search activity forecasting a bottom for owners equivalent rent (OER). Searches positively correlated with OER have moderated into 2021.
DO NOT MISS: The Rent Narrative May Get Messy
See full report below: