Long US 10-year ‘Breakeven’ Inflation in 2016 – Goldman Sachs

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 31, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) - Research Team at Goldman Sachs, suggests to stay long 10-year US break-even inflation (USGGBE10 Index), opened on 10 November 2015 at 1.60%, with an initial target of 2.0% and a stop on a close below 1.40%.

    Key Quotes

    “In the US, core CPI inflation is running just below 2%, and the more sticky service price components of the index are trending upwards, contributing more than 200bp to the headline reading. Yet, since the oil price crash in mid-2014, inflation expectations priced by the market have declined all the way out to 10-years. Currently, the inflation swap market prices that headline CPI will not reach 2% (the Fed’s inflation objective) until around 2020.”

    “Moreover, the option market assigns a 40% probability to CPI averaging less than 1% over the next 5 years. We think this represents an opportunity to take the other side of too pessimistic expectations by being long 10-year TIPS and short nominal Treasury bonds. Our view is predicated on the idea that continued above-trend growth will lead to a further build-up of wage and price pressures. In our central outlook, the drag to headline inflation from the energy complex should gradually reverse in the coming months.”
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