Wall Street corrects heavily, the VIX reaches 19, the market becomes nervous and volatile… but this does not result in a “flight to safe haven” reflex, that is, 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 the FED and other central banks raising 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 “transitory” inflation will no longer be taken seriously. If the Strait of Hormuz were to reopen by mid-June (in the best case scenario), the price of oil will hardly fall below $90, considering that 5 million barrels of production capacity have disappeared due to the war (not just the one on “pause” 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 rebuild their strategic reserves.
Not surprisingly, the rise in oil prices and its derivatives fuels the rise in consumer prices in the United States: they increased slightly more than expected last month, reaching an annual rate of 3.8%, while economists 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 tapping into their stocks at a pace not seen since…1973.
“Total inflation is at its highest level 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 come from the “energy” component.
It has now been over five years 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 – 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).
Core inflation is at its highest since September:
In underlying data (excluding energy and food products), the annual inflation rate has reached 2.8%, returning to its highest level since last September, compared to 2.6% in March, while the consensus was 2.7%.
Sequentially, the increase in consumer prices stood at 0.6% in total data and 0.4% in underlying data in April, with the latter figure slightly exceeding expectations, 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 the analyst.
The increase in housing costs (+0.6%) also contributed to the rise recorded this month, and the so-called “supercore” CPI, corresponding to services excluding housing 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%<br-airfares/airline tickets: +20.7% (jet fuel +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 3.8% score over 1 year seems completely insignificant in light of the “felt inflation” (but which bites hard into real purchasing power).
Investors are not mistaken: the 10-year T-Bond rises by +4.5Pts to 4.458% (generally, when the 10-year approaches 4.5%, Trump makes an “announcement”), the 30-year by +3Pts to 5.017%, the 2-year by +5Pts to 3.997%, not to mention 4%.
The risk of inflation is felt across all continents: it deteriorates sharply for our OATs with +8Pts to 3.744%, Bunds add +6.3Pts to 3.106% (worst score this year), Italian BTPs soar by +9.7Pts to 3.880% and Spanish Bonos add +7.3Pts to 3.5400%.
But not surprisingly, it is the “Gilts” that plummet the most heavily with a yield that jumps symmetrically by +11Pts to 5.112% as Keir Starmer faces the first defections in his government after last Thursday’s electoral debacle.
Finally, in Japan, the 10-year sets a new 29-year record (June 1997) at 2.546% (and 2.565% in session), a rise of +3.5Pts, the 40-year shoots up by +6Pts to 4.088%, and even 4.1380% in session, which is simply its absolute record.
