The fact that oil prices heavily influence inflation expectations is a well-known fact. However, bond traders are not really buying into the recent rally in WTI oil prices. Inflation expectations in the US are well represented by 5-year Treasury Inflation Protected Securities (TIPS)/Breakevens.
Marc Ostwald, Strategist at ADM Investor Services International, points out to the fact that Breakevens have not responded to the recent rise in oil prices. Ostwald added the divergence makes today’s 5-year TIPS auction interesting.
Highlights:
Fed’s data-dependency talk is confusing markets
The focus now is on next week’s Jackson Hole event
“We should certainly look at reversing sterling short positions - everyone had positioned for soft/softer data post-referendum data”
“Positive surprise on UK data front would force markets to begin widening of the yield differential in favor of GBP”
“ECB accounts/minutes is a non-event for the markets”
“USD/JPY - this is the trickiest one as we don’t know what BOJ would do, would prefer to wait rather than go long on dollar-yen now”