Halister News

(Bloomberg) -- Don’t expect another strong move lower in USD and EUR zero-coupon inflation swaps as they have decoupled from any reasonable combination of medium-term inflation forecasts, inflation mandates and realized inflation, UniCredit strategist Michael Rottmann writes in client note.

• Start accumulating a starting position in 5Y5Y USD and 5Y5Y EUR ZC inflation swaps at around these levels
• In cash, ultra-long breakeven inflation in Italy and Germany attractive
• Expect 5Y5Y EUR ZC inflation swap to at least show a modest rebound with oil-price volatility settling down and risk aversion abating
• Expect euro-area core inflation in 1Q 2017 at 1.1% with headline inflation at 1.3%
• Forecast U.S. core inflation in 1Q 2017 at 2.3% with headline inflation at 2.2%
• Spiking oil-price volatility has fueled a massive undershooting of ZC inflation swaps but will likely abate soon
• While not solely linked to collapsing oil prices, heightened financial stress has added to pressure on ZC inflation swaps but will likely peak during the next few mos.