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 offsets the “risk-off”: it’s the anticipation of more severe inflation than expected, and thus, the risk of seeing the Fed and other central banks raise their interest rates.
After 7 weeks of disruption in oil supplies, with a barrel back above $100 for “WTI” ($101.5) and $107.5 for “Brent,” the hypothesis of a “transitory” inflation surge will no longer be taken seriously.
If the Strait of Hormuz were to reopen by mid-June (in the best-case scenario), oil prices would hardly fall below $90, considering 5 million barrels of production capacity that have disappeared due to the war (not just the one on hold in the Gulf, but also between Russia and Ukraine, and well, no “pause”), 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 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 had expected 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 dipping into their stocks at a pace not seen since…1973.
“Total inflation is at its highest since May 2023,” notes Bastien Drut, head of strategy and analysis at CPRAM, explaining that about two-thirds of the inflation increase for the month comes from the “energy” component.
It has been over five years since inflation has been above the Fed’s target (29% cumulative, facing wages that have increased by 26% on average in the United States): there will certainly be a majority of voices within the FOMC – which will be 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 “core” inflation is at its highest since September:
In underlying data (excluding energy and food products), the annual inflation rate rose to 2.8%, reaching its highest level since last September, compared to 2.6% in March, while the consensus was 2.7%.
Sequentially, the rise in consumer prices reached 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 a reading among the highest observed since the mid-1970s,” notes this analyst.
He notes that the increase in housing costs (0.6%) also contributed to the recorded increase this month, and that the so-called “supercore” CPI, which corresponds to non-housing services in the core CPI, increased by 0.45% in April.
But over 1 year, many price increases are spectacular:
-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 weight of these expenses in the budget of American households, a score of 3.8% over 1 year seems completely trivial in light of the “felt inflation” (but which bites hard into real purchasing power).
Investors are not mistaken: the 10-year T-Bond is rising to 4.458% (generally, when the 10-year approaches 4.5%, Trump makes an “announcement”), the 30-year to 5.017%, the 2-year to 3.997%, almost 4%.
The inflation risk is present across all continents: it is deteriorating sharply for OATs with a rise 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 plummet the most drastically, with a yield jumping symmetrically by 11 points to 5.112%, as Keir Starmer faces the first defections in his government after last Thursday’s electoral rout.
Finally, in Japan, the 10-year hits a new record of 29 years (June 1997) at 2.546% (and 2.565% intraday), a jump of 3.5 points, the 40-year surges by 6 points to 4.088%, and even 4.1380% intraday, setting a new all-time high.
