US consumer price pressures are subsiding

“Declining US inflation is positive for US bonds, and investors should also keep a global approach to potentially benefit from attractive yields elsewhere, including in emerging markets.”

  • US inflation maintained its declining trajectory, even as it remains above the Fed’s 2% target.
  • Whilst this may lead the Fed to reduce rates in second half this year, the bank is likely to remain vigilant.
  • Thus, a flexible approach in fixed income may help unearth attractive opportunities, including in US, Europe.

US consumer inflation declined as expected in April to 3.4% (year-on-year), owing to slowing pressures in both the goods and services components. We think inflation should remain on a downward path this year, making the Fed more inclined to cut rates.

Inflation is key here and any upside surprise may lead the central bank to delay cuts. In particular, pressures from geopolitical tensions that could push up the prices of commodities such as oil, would not make the Fed’s job any easier.

Elsewhere, inflation patterns in Europe are also showing signs of a decline that could lead the ECB to reduce rates, potentially ahead of the Fed.

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