Global Inflation Outlook 2025 Cross-market divergence in breakevens

Summary of Global Inflation Outlook 2025 by J.P. Morgan Industry Overview - The report focuses on the global inflation outlook for 2025, analyzing macroeconomic trends across various regions including the Euro area, the UK, and the US, with insights into inflation dynamics and breakeven rates [2][6][18]. Key Points and Arguments Global Economic Forecast - The baseline forecast for global economic growth in 2025 is resilient, with a high-for-long policy stance as goods price disinflation ceases and core service inflation remains sticky [2][7]. - Inflation breakevens have diverged, with Euro area breakevens lower year-to-date compared to slightly higher US and UK breakevens [7][8]. Euro Area Inflation - Headline HICP is expected to fall back to the 2.0% year-on-year target by Q2 2025 and drop to 1.8% by the end of the year, with core HICP forecasted at 2.3% in Q2 2025 and 2.0% by year-end [9][23]. - The decline in inflation is driven by a significant decrease in services inflation and lower wage inflation, projected to be around 3% annually by mid-2025 [9][23]. - The 1Yx1Y HICP is expected to grind modestly lower over 2025, while the 5Yx5Y HICP is anticipated to trade in a 2.00-2.20% range in the first half of 2025 [14][19]. UK Inflation - The UK RPI is expected to average 4% in 2025, with slow ongoing disinflation and limited upside risks from energy commodities [15]. - The 1Yx1Y RPI is unlikely to exceed 4%, while the 5Yx5Y RPI is expected to remain around current levels (3.30%) [15]. US Inflation - In the US, breakevens are projected to remain near the high end of 2024 ranges in the first half of 2025, influenced by tariff implementations and commodity price declines [16]. - Core CPI inflation is likely to slow further but remain above 2.0%, with risks skewed to the upside due to policy uncertainty [8][16]. Commodity Prices and External Factors - Recent increases in TTF gas prices are attributed to colder weather, uncertainty regarding gas flows through Ukraine, and delays in North American LNG export projects [26]. - The report anticipates that gas prices may decline to €35/MWh by Q2 2025 due to increased global supply [26]. Market Dynamics - The report highlights a steepening bias on the 1Yx1Y/5Yx5Y HICP curve due to macro risk factors, with expectations of increased US tariffs on Chinese goods adding upward pressure to global inflation [37]. - The 10Y real EUR yields are viewed as relatively cheap, with a bullish outlook given the downside risks to Euro area growth [14][45]. Issuance Forecasts - Euro area linker issuance is expected to be modestly higher in 2025, around €70 billion, with a significant portion in HICP-linked bonds [59][62]. - French index-linked bond issuance is projected to remain robust, with expectations of €29 billion in 2025 [52][62]. Other Important Insights - The divergence in inflation expectations between the Euro area and the US is a key theme, with the Euro area showing clearer disinflation trends compared to the stickier US CPI [38]. - The report emphasizes the importance of monitoring geopolitical developments, such as trade negotiations and potential retaliatory tariffs, which could impact inflation dynamics [25][38]. This comprehensive analysis provides a detailed outlook on inflation trends and market expectations for 2025, highlighting the interplay between macroeconomic factors and regional dynamics.