Buy EUR Breakevens; Reduce Longs in TIPS on CPI Slowdown: HSBC
(Bloomberg) -- Value of euro-zone inflation instruments as a means of diversification and inflation protection remains high, HSBC strategist Theologis Chapsalis writes in client note.
- Since the March ECB meeting, the 5y5y inflation swap has actually fallen, even though oil prices have risen modestly
- Despite a comprehensive set of ECB easing measures, market participants were left unimpressed and failed to increase medium- to long-term inflation expectations due to:
- Carry was prohibitively negative until the end of March, deterring longs
- Easing was accompanied by a strengthening in EUR
- Investor community is coming firmly around to the belief that the softness in euro-zone core inflation is more than transient
- Recommend reducing long TIPS breakeven positions, especially as core U.S. CPI is likely to slow down in coming months
- Favor USD 5s10s breakeven steepeners given the shape of the breakeven curve and the upcoming supply
- Unless Brent rises back to around $60, the current flatness of the slope isn’t sustainable
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
Tickers 2539Z GR (European Central Bank)
People Theologis Chapsalis (HSBC Bank PLC)
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