UBS Fixed Income-Global Inflation Strategy _The Global Inflation Friday_ Gale

ab6 June 2025Global ResearchGlobal Inflation StrategyThe Global Inflation FridayLong TIPS into CPI week Tactically long 10y breakevens. We are still buyers of TIPS breakevens. Our 5y5y model flashes a tactical buy signal. Breakevens have traded at a high correlation with equities in recent weeks and we would expect that to continue, but valuations don't appear to have fully integrated recent commodity strength (Figure 9The inflation sentiment scorecard pulout. 5y5y has ben tracking risk, but not the raly in comodities.). Our recommendation to buy 10y TIPS breakevens three weeks ago is running a 1.5bp loss and we maintain it.Front end breakevens look cheap and part of a constructive view on TIPS overall relies on higher accrual over the coming months as tariff impact feeds through (even if CPI only tracks fixings, TIPS should carry positively in every remaining month this year). Alan makes the point that stronger tariff-led inflation may not be clear to all in coming figures. (Also note possible quality problems with April's print.) But a tariff impact is likely to become clearer in the figures from June or July. Tariff news will be a more important driver, but seeing is also believing: passthrough of higher inflation may help draw interest to TIPS at these valuations. A gap opens up between UBS forecasts and market-based fixings of about 40bp through H2 this year (Figure 13US CPI-u). Is that justified? There are two key risks:
Tariff de-escalation. How far might investors think tariffs could be rolled back from the UBS baseline assumption? (Figure 2Fixings average 40bp above UBS forecasts from H1 (se Figure 13US CPI-u.) How much of that is driven by tarif de-escalation? This is the schedule for the baseline (memo: ad 4bp for doubling of stel/aluminium tarif.) It sems hard to have confidence in significant improvements. Estimated first-round impacts of various tarifs on core PCE prices. Se Alan's inflation monthly for more.) Estimated first-round impacts of various tarifs on core PCE prices. Se Alan's inflation monthlyor more. That baseline could be wrong in lots of ways but, as an example, 40bp could represent a combination of something like China non-sectoral tariffs to be halved to ~15% (-8bp), non-USMCA dropped 25% to 10% (-16bp), steel/aluminium tariffs put back to 25% (-4bp) and auto tariffs to drop from 25% to 10%. A comination like that looks aggressive as a scenario, however. Relief on reciprocal tariffs would have more of an impact: 5% instead of 10% could reduce the inflationary impulse by around 30bp. But that may be a stretch too, since the only deal so far (the UK's ~9%, pending detail), is widely expected to represent a floor for other ongoing talks.
Asymmetry into economic strength/weakness. A reasonably severe economic slowdown might justify ~50bp lower inflation, or more, mostly through lower energy (-10% oil is normally taken to subtract ~40bp from CPI) but with some impact via higher unemployment on core-inflation too (1pp