Global Strategy "Rates Map - Reality Checks on Fed, AI and Transitory Pr..."

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Global Strategy "Rates Map - Reality Checks on Fed, AI and Transitory Pr..."

2023, US yields did not move meaningfully on release dates. This tell you that bond

markets see AI developments as gradual diffusion rather than a transformative shock.

We have also pointed to some structural headwinds. Energy-consuming data centers,

chip bottlenecks, safeguard concerns, and a labour market that does not retrain

overnight means that AI is more likely to be inflationary than disinflationary as the ECB's

Schnabel has flagged. Bond markets could remain doubtful until the productivity gains

show up in primary surpluses in a durable, measurable way, .

Inflation: Transitory or stubborn?

Elevated inflation prints are coming (see Figure 14USmarket-basedinflationexpectationsisexpectedtopeakat4.4%yoyinJune'26from3.8%inApriland1yfromnowinflation(USWIT1)ispricedat3.4%and Figure 15Euroareamarket-basedinflationpeaksaroundJan'27at4%yoyand1yinflationexpectation(EUSWI1)tradesat3.8%.) but 1y1y inflation

swaps at 2.60% yoy in US and 2.16% yoy in the euro area signal that markets are not

panicking (Figure 4Elevatedinflationprintsarecomingbut1y1yinflationswapsat2.60%yoyinUSand2.16%yoyintheeuroareasignalthatmarketsarenotpanicking.Figureshows1yinflationswapin1y-EuroareaandUS(%).). In fact, 5y euro area inflation breakevens are approaching levels

where holding some exposure to upside risks to medium-term inflation is becoming

more attractive (Figure 55yinflationbreakevens).

Front-end trades - Extend target on long 1y1y SEK vs US

On 5 May, we opened a long 1y1y SEK vs USD given the persistent inflation undershoots

and relatively soft labour market in Sweden versus a drift up in US rate expectations. We

previously moved the target to -180 bps (from -165 bps) but think this trade can now