And you thought inflation was under control?

For several weeks now, we've been witnessing the traditional sweep of experts explaining that the work of central banks has borne fruit, that inflation is (on the way to being) brought under control and that further rate hikes should no longer be necessary. However, the latest US figures paint a more mixed picture.

Last Friday, the deflated PCE Core, one of the US central bank's preferred indicators of inflation, came in slightly above expectations at +4.4% y/y, versus +4.3% expected. This compares with +4.2% in March. More generally, whatever the indicator used, inflation is stabilizing rather than actually falling. This echoes the Goldman Sachs study we mentioned two weeks ago, which found that "the Fed has rarely followed a pause with [rate] cuts within six months when the labor market was tight".

It seems that investors are beginning to incorporate this new paradigm into their estimates, since according to Fedwatch, the probability of a rate hike in June rose from 24% on April 28 to 64% on May 26! At the same time, the US 2-year yield tested a key level at 4.61%. Any breakout would pave the way for new annual highs, beyond the 5.08% reached last March. At the same time, we'll be keeping a close eye on the 2.55% resistance level on the German 10-year.