Daily Brief – Flavour of the day: Inflation

Flavour of the day: Inflation

Yesterday the price of oil broke through $100 per barrel on Brent once again. WTI Crude stood only $5 or so shy of the level of Brent, closing in on the physiologic level also. As a result of the price-action in the commodity space, inflation expectations also began to rise. Rising inflation expectations brought with it a hawkish upgrade to the implied policy path of the Bank of England and European Central Bank.

The terminal rate for both economies was revised higher as the need for additional interest rate hikes were priced in. The market now sees as many as four interest rate hikes from each central bank, the ECB and BoE, within 1 year. That compares with closer to just one hike priced in as of this time last month in the UK and Eurozone. The revision higher of the ECB’s expected policy path has been stronger and steeper than the UK, corresponding with pressure on GBPEUR over this period.

In a trading day dominated by evolving interest rate expectations amongst the UK and Eurozone, the US was a late contender to steal the show. When the Treasury expanded the prospect of its buyback operations from a cap of $2bn to a floor of $4bn the multi-billion question (literally) became what size the operation would ultimately be. Dollar-bears had speculated that the buyback could materialise to become as large as $10bn. Ahead of todays’ US Treasury operations, the announcement was made yesterday at 3pm, and $6bn was to be the number. It’s a material cost for the Treasury at that size and the risk remains it may not be sustained. However, as a result of falling short of those expectations that were looking for a much larger buyback scheme, the US Dollar lurched higher whilst yields fell, erasing and reversing earlier losses.

Discussion and Analysis by Charles Porter

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