J.P.Morgan: Go Short 5Y5Y Inflation Swaps

J.P.Morgan have recommended going short 5Y5Y U.S. inflation swaps at 267.1bp. They flag several points:

• “First, conciliatory comments from Ukraine President Zelensky provide some hope that we could be nearing the end of the Ukraine-Russia crisis, and the UAE and Iraq signalled that OPEC+ may have greater willingness to raise output. Both developments helped oil prices move lower throughout today’s session, though the reaction thus far in TIPS has been concentrated at the front end.”
• “Second, even if negotiations stall and oil prices jump higher again, the negative implications for medium-term growth should put downward pressure on 5Y5Y forwards over time.”
• “Third, while Powell noted last week that the Fed would proceed “cautiously” in light of the uncertain geopolitical backdrop, he left the door open to larger-than-25bp hikes later this year if inflation comes in higher or is more persistent than expected. In fact, while the peak of the OIS curve declined roughly 25bp last week, it has now fully retraced that move over the last few sessions. We expect the FOMC will commence its series of rate hikes with a 25bp adjustment next week, and that Powell will reiterate a hawkish stance on inflation, which should allow longer-run forwards to come off of their highs.”
• “Fourth, while the 10-Year inflation swap/breakeven basis has also narrowed slightly from Friday’s highs, it remains near the high end of its 2-Year trading range, suggesting inflation swaps have further room to underperform.”