Rate: US inflation and geopolitical context weigh heavily

Wall Street corrects heavily, the VIX reaches 19, the market becomes nervous and volatile… but this does not translate into a “flight to safe haven” reflex, meaning government bonds. Because an opposing force compensates for the “risk-off”: it is the anticipation of more severe inflation than expected, and consequently, the risk of seeing the FED and other central banks raise their interest rates.

After 7 weeks of disruptions in oil supplies, with a barrel back above $100 for “WTI” ($101.5) and $107.5 for “Brent,” the hypothesis of “transitory” inflation will no longer be taken seriously. If the Strait of Hormuz were to reopen by mid-June (in the best-case scenario), oil prices will hardly fall below $90, considering the 5 million barrels of production capacity that have disappeared due to the war (not only the one on hold in the Gulf, but also between Russia and Ukraine, and no break there), while the United States, Europe, and all Asian countries will try, all at the same time, to replenish their strategic reserves.

Unsurprisingly, the rise in oil prices and its derivatives fuels the increase in consumer prices in the United States: they rose slightly more than expected last month, reaching an annual rate of 3.8%, while economists were expecting a rate of 3.7% after the 3.3% observed in March. It would have been much worse if the US and the EU were not drawing from their stocks at a pace not seen since…1973.

“The total inflation is at its highest level since May 2023,” emphasizes Bastien Drut, head of strategy and analysis at CPRAM, explaining that about two-thirds of the inflation increase in the month comes from the “energy” component.

It has been over five years now that inflation has been above the Fed’s target (+29% cumulative, compared to wages that have increased by +26% on average in the United States): there will certainly be a majority of voices within the FOMC – chaired by Kevin Warsh – calling for the abandonment of the “accommodative bias” and possibly a rate hike (31% consensus for at least one hike by the end of 2026).

The underlying (“core”) inflation is at its highest since September:

In underlying data (excluding energy and food products), the annual inflation rate stood at 2.8%, reaching its highest level since last September, compared to 2.6% in March, while the consensus was 2.7%.

In sequential terms, the increase in consumer prices stood at 0.6% in total data and 0.4% in underlying data in April, the latter figure slightly surprising, according to Josh Jamner at ClearBridge Investments.

“This development accelerates inflation over two months to 1.5%, its highest level since 2022 and one of the highest readings since the mid-1970s,” notes this analyst.

He notes that the increase in housing costs (+0.6%) also contributed to the growth recorded this month, and that the so-called “supercore” CPI, corresponding to services excluding housing in the core CPI, advanced by 0.45% in April.

But over the year, many price increases are significant:

-energy products (oil, gas): +29.2% -gasoline: +28.4% -airfares/airline tickets: +20.7% (kerosene +180%) -energy (distribution/utilities): +17.9% -electricity: +6.1% -fruits and vegetables: +6.1% -hospital services: +5.5% -car repairs: +5.1%

Given the relative weighted importance of these expenses in the budgets of American households, a 3.8% score over one year seems completely insignificant in light of the “felt inflation” (but it bites hard into real purchasing power).

Investors are not mistaken: the 10-year T-Bond rises by +4.5 points to 4.458% (generally, when the 10-year approaches 4.5%, Trump makes an announcement), the 30-year by +3 points to 5.017%, the 2-year by +5 points to 3.997%, not to say 4%.

The inflation risk is spreading across all continents: it deteriorates sharply for our OATs with +8 points to 3.744%, Bunds add +6.3 points to 3.106% (worst score of the year), Italian BTPs soar by +9.7 points to 3.880%, and Spanish Bonos add +7.3 points to 3.5400%. But unsurprisingly, it is the Gilts that plunge most heavily with a yield that jumps symmetrically by +11 points to 5.112% as Keir Starmer faces the first defections from his government after last Thursday’s electoral rout.

Finally, in Japan, the 10-year hits a new 29-year record (June 1997) at 2.546% (and 2.565% in session), up by +3.5 points, the 40-year soars by +6 points to 4.088%, and even 4.1380% in session, which is simply its absolute record.