J.P.Morgan Still Neutral On Breakevens

J.P.Morgan note that "prospects of further stimulus under a unified Congress, combined with the stimulus already delivered, certainly add substantial upside risk to our current TIPS breakeven forecasts over the balance of this year, given the implications for a stronger growth trajectory and quicker return to full employment. Importantly, this further reduces the risk that still-elevated labor market slack in coming years results in consistently below-target inflation. Thus, it's not surprising that credibility in the Fed's FAIT strategy has risen. However, breakevens have strongly outperformed versus their drivers over the past month, with the 10-year sector now appearing 16bp rich to our fair value model - more than twice the standard error. This model controls for oil prices, nominal yields, Fed balance sheet size, credit spreads, and realized y/y core CPI. Thus, said another way, given the residual of the model, current 10-year breakevens appear more consistent with realized core CPI near 2.40%, all else equal. Meanwhile, significant labor market slack remains, spending and domestic mobility have declined recently as a result of the rise in infection rates, and we continue to think the path to above-target inflation will be a gradual one. Against this backdrop, we think markets will be slow to build further credibility with FAIT, and we remain neutral on breakevens for now."