UBS Fixed Income-Global Rates Strategy _Rates Map A more bullish stance into...-108406011.pdf

ab27May2024GlobalResearchandEvidenceLabGlobalRatesStrategyRatesMap:Amorebullishstanceintosummer˜WearebeginningtopivottoamorebullishstanceonUSratesintothesummer.TheequitymarketrallyhasfuelledtheUSexceptionalismtheme,keepingUSrateshigher.ButtheUSeconomyappearstobeslowingandasignificantpartoftheequityrallyhasbeendrivenbynon-economicfactors(AI),sowethinktherateimpactwillfadeinthecomingmonths.˜Fornow,stronger-than-expectedinflationintheUKandPMIshaveresultedinhigherratesgloballyandcontinuedre-pricinginpolicyratepathsandflattercurves.Marketsarepricingonly32bpsofcutsfromtheBoE,60bpsfromtheECBand34bpsfromtheFedbyyear-end.˜Wehavebeenrecommendingclientstoaddtolongswhen10ybundyieldstradeover2.5%,butbundyieldscouldtesthigherlevelsthisweekasUBSexpectseuroareaservicesinflation(outon31May)torisetemporarily(by0.1pp)to3.8%y/y,largelyduetotravelrelatedcomponents.Weexpectheadlineinflationtorisetemporarily,by0.1ppto2.5%y/yandcoreinflationat2.7%y/y,inlinewithconsensus.˜ButwageandinflationdatashouldstillallowtheECBtocutatoutlookupdatesin2024.TheECB"sQ1releaseofnegotiatedwagegrowthstoodat4.7%y/ybutadditionalinformationsuggestslowerwagegrowthof4.1%y/yonaverageinallactiveagreementsfor2024,whichisalevelshiftdowncomparedtopreviouslyalbeitwithstillatemporarypick-upinQ4.˜WeexpectEGBspreadstorangetradeinthecomingweeksbutremainbroadlysupportedintoEUelections.VerylownetsupplyduetoredemptionscouldalsobesupportiveforEGBsthisweek.˜WedonotexpectanymajorshiftintheBoE"sreactionfunctionduetoupcomingelections.Inourview,cyclicalfactorssuchasprogressindisinflation,theeconomicoutlook,anddevelopmentsinthelabourmarketwillcontinuetoinfluencepolicyrateexpectations,UKduration,andcurvedynamicsinthenearterm.Thedelayincuttingcyclewilllikelykeepcurvesinvertedinthenearterm.Wethinkthatthelikelihoodofsubstantialfiscalannouncements(fromeitherparty)islimitedintheshortterm.˜WeseevalueinreceivingtheBoEDec2024meetingasApril"sUKheadlineinflationfellclosertotheBoE"sinflationtarget,evenifservicesinflationdeclinedataslowerpacethanthemarkethadexpected.Theinflationmomentumindicatorsforthosecomponents,asmeasuredbytheannualized3-month/3-monthrates,havegainedmomentuminApril(Figure3InflationmomentumintheUK).ThishasshiftedfocusforthefirstratecutfromtheBoEfromJunetoAugust.˜Aheadofthenextmeetingon20June,theBoEMPCwillreceiveanotherlabourmarketreporton11JuneandtheinflationreportforMayon19June.OurcurrentMayinflationforecastis2%y/yforheadline,whileservicesinflationforecaststandsat5.4%y/y,whichisonly0.1ppabovetheBank"sMayprojections.Hence,aJunecutcouldnotberuledoutcompletely.˜WehavelikedaSONIADec24vsDec25flattenerasthistradeofferedsomeprotectionincasetradesrepricehigherorcutsaredelayed.TheSONIADec24vs25curveflattenedlastweekandweclosethetradeastherisk/rewardislessattractive(entry:-55bps,exit:-65bps).˜WhileweexpecttheBoEtocontinuewindingdownitsgiltAPFportfolio,weseeastrongpossibilityofamoregradualreductionofitsbalancesheetbyceasingactivegiltsalesafterSeptember.ThiswouldreducethesizeoftheAPFportfoliofromThisreporthasbeenprepa