UBS Fixed Income-Global Inflation Strategy _The Global Inflation Friday_ Gale-117660206

ab5 September 2025Global ResearchGlobal Inflation StrategyThe Global Inflation FridayLong TIPS despite the labour market. RPI steepeners.USDi. Long 5y5y CPI despite economic slowdown.
Stay long US breakevens. The tactical model for 5y5y still flashes a buy signal. We carry forward the recommendation from August 1st another week. .
Conviction remains tactical, not strategic. 5y5y (ILS) is now 2.47%. Our August target for 5y5y was 2.5% and we hold that but may review next week, with 2.545% in mind. Those who like to cross check by drawing lines on charts might notice possible rising trend (since mid-August) meeting a declining one (since mid-July), which coincides with retracements of the Q2 rally and the 2023-25 sell-off all at 248.5bp in 5y5y.
Slight upside skew in CPI risk for the August print. Fixings are fair if you look over the next six months (Figure 17US CPI-u). The market is also very close to the UBS NSA forecast (323.962) - see preview. Alan sees slight upside risk in the non-rent services forecast. Note that the forecast may be revised if there is a strong enough signal from Adobe and remember that print risk has stepped up permanently because of disruption to data collection.
Long-term breakevens are tempered by fundamental expectations. The market does not believe that inflation will show much persistence as tariff effects fade next year (Figure 17US CPI-u). There is also reasonably little buy-in to the idea that the Fed will change its reaction function meaningfully under new leadership. (In the SOFR strip, a rally toward 'neutral' is in line with the path UBS economics has projected for a long time now - see p129 - and can easily be justified by slowing data.)
Downside risks to the demand cycle also keep us tactical on breakevens. We take downside cyclical risk seriously. The labour market report today appears to confirm the slowdown in the labour market that has been seen in other recent data - ADP, claims, JOLTS, Beige Book.The updated hard data-based recession risk indicator continues strongly to suggest that we shouldn't get too excited that the Q2 soft-patch was driven by political uncertainty that markets have made peace with.
Oil is beating stocks in the battle for breakevens. The key tension for inflation sentiment now seems to be traditional risk vs energy. Breakevens have preferred to track oil, where downside risks in the short term (OPEC+ call this weekend) but also over the medium term, where consensus projections for oversupply are tempered by rather less certain next steps on sanctions.
Retail support. Retail (ETF) flows have actually been moderately supportive (Figure 4TIPS ETFs inflows indicate beter retail interest) and real rate performance should help to maintain that. But institutional demand is likely to be somewhat undermined by correlations - breakevens have passed from strongly to only weakly diversifying over the past year (Figure 3Six-month roling corelations for wekly returns. Rates diversify risk