Will Cunliffe
Research Analyst, The Officials
Oil Keeps Inflation Pressure Alive, US Diesel Tops $5/gal, USD Support
Oil lifts inflation expectations; central banks turn hawkish, yields rise, USD firms, and consumers—especially younger households—face press
Oil is still keeping inflation pressure alive into the Fed.
2 yr breakevens have picked up in line with crude, but remain a long way off the 2022 highs. OIS currently pricing no cut until September FOMC and only -27 bps over the next 12 months. In Europe, repricing of inflation risks has been more acute, with spread between 2 year breakevens in the UK and the US widening further (Figure 1). For the BoE, the OIS is now pricing +14.3 bps of hikes over the next 12 months, while the ECB OIS is pricing +39.5 bps.
US diesel has topped $5/gallon for the first time since December 2022, sharpening the inflation threat to Treasuries (Figure 2). Beyond the direct CPI boost, higher diesel costs hit freight, agriculture and construction quickly, risking a rise in inflation expectations – and, if sustained, a deeper bond selloff.
This morning USTs are cheaper by 1–2bps (2Y 3.682%, 10Y 4.234%, 30Y 4.880%), looking like positioning into the Fed rather than a clean risk-off. JGBs are firmer with strong 20Y demand (bid/cover 3.25x). The BOJ is expected to hold at 0.75% but is increasingly sensitive to inflation.
Nearly half of Americans now report struggling with rent or mortgage payments, but the real pressure point is younger households, especially Gen Z (Figure 3). That matters because they have the least savings, the weakest asset cushion, and the highest sensitivity to rent, rates, and wage volatility. When housing absorbs more income, discretionary spending gets squeezed first. The result is a more fragile consumer backdrop: less travel, less dining, delayed healthcare, and a younger cohort that is forced to trade down just to stay housed.
The RBA hiked 25bp to 4.1% on a tight 5-4 split committee, but Aussie bonds rallied 7–8bps as the decision underwhelmed hawkish expectations.
USD remains somewhat supported (DXY 99.74, up about 1.8% since the start of the month). GBP/USD 1.3300 with resistance 1.3350. USD/JPY in a fairly tight range 159.02–159.49, holding firm despite intervention talk. AUD/USD 0.7049–0.7094, softer post-RBA.
Data today: ADP weekly, ZEW econ sentiment, Japan trade
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