J.P.Morgan: Front Breakevens Are Cheap Versus Fundamentals

J.P.Morgan write “although annual headline inflation likely peaked in Q422, recent underperformance means Australian breakevens are now cheap across the curve. This is particularly true for the 2025 maturity which at 3.15% is materially lower than RBA/JPM inflation forecasts over the life of the linker. The RBA’s headline inflation forecasts now extend into mid-2025, which given Australia’s linker pricing methodology (t-2 quarters) means the Bank’s forecast covers the entire breakeven reference periods (Q125). If the RBA’s forecasts are correct, inflation is set to average around 4.5% over the life of the 2025 breakeven which implies front-end linkers are extremely cheap. We are less upbeat on near-term inflation prospects, though still expect inflation to average above 4% over the same time horizon which also argues that front breakevens are cheap versus fundamentals.”