US breakevens are lower than when Bullard hit panic button
The one story no one is talking about is the cratering in US inflation expectations and what it means for the Fed.
When Bullard hit the panic button at the bottom of the October market tantrum he said:
“Inflation expectations are declining in the U.S.,” he said. “That’s an important consideration for a central bank. And for that reason I think that a logical policy response at this juncture may be to delay the end of the QE.”
What’s he’s mainly talking about on inflation expectations are 5-year breakevens, which are the main market-derived method of measure inflation expectations.
US 5 year breakevens
Ten-year breakevens are also below the Oct lows and trading at 1.80%.
In mid-November, Bullard again mentioned breakevens when he said:
- Market-based measures of inflation expectations have rebounded since mid-Oct
Well they haven’t any more.
You can (and probably should) point to the decline in oil prices as the driver for the fall in inflation but that’s a one-year effect. The bond market is also flashing worries about years #2 to #10.
That’s more of a US dollar story. The dramatic drops in bond yields along with QE in Japan and the likelihood of Drag-QE from the ECB along with lower global growth and causing a never-ending wave of US dollar buying and that’s also deflationary for imports.
Why is the Fed talking about tightening again?
