Despite 4 weaker-than-expected US CPI prints, TIPS outperformed their nominal counterparts by 24bps in July. Global linkers have also begun to perform in recent weeks, with exposure to FX enhancing returns this year.
TIPS were supported by a rebound in oil and commodities, as well as by a dovish turn by the Fed
The global economic backdrop continues to be supportive, with firm PMI prints pointing to manufacturing strength and reduced downside risks
EM continues to perform well, supported by the combination of firmer commodities and a softer dollar, along with a slightly less hawkish Fed.
Three weak CPI prints, rising oil volatility, a Fed bent on removing monetary accommodation, and diminished hopes for fiscal and regulatory salvation combined in a perfect storm for TIPS breakevens in Q2
TIPS have bounced back in the last couple of weeks, led by oil and yet another strong TIPS auction
The global economic backdrop has been more supportive, with strong PMI prints pointing to continued manufacturing strength and reduced downside risks
But there too, falling energy prices and global central bank hawkishness have weighed on developed market linkers
EM continues to perform well and we’d argue that the sector provides a global disinflationary hedge in addition to the more commonly attributed benefits of diversification and commodity exposure
We conclude with an expanded section of charts looking at some of the trends and developments in the inflation data and market positioning
The strengthening global economy continues to take a back seat to rising energy volatility and domestic political risks
Oil resumed selling after OPEC and non-OPEC exporters voted to extend production limits
Fiscal stimulus and tax and regulatory reform, once upside risks to domestic growth and inflation, have given way to political risk with the Justice Department naming a special counsel to oversee the Russia investigation
The Fed is still expected to hike rates again later this month, but the path going forward is increasingly uncertain
TIPS valuations remain supportive from a fundamental standpoint as breakevens remain cheap to inflation forecasts