UBS Asset Management forecasts continued inflation easing and declining bond yields, stating on July 23 (local time) that Middle East energy supply disruptions will ease over time. The asset manager attributes this outlook to declining inflation expectations despite elevated geopolitical tensions, with the 10-year breakeven inflation rate at 2.25% compared to 2.5% in May. This assessment comes as June CPI data showed core inflation declining month-over-month for the first time since 2020, reinforcing UBS's view that Federal Reserve policy is already restrictive enough to drive continued disinflation without additional rate hikes.
Inflation Indicators Show Continued Easing Trend
UBS Asset Management noted that inflation expectations remain below recent peaks despite rising geopolitical tensions. The firm pointed to the 10-year breakeven inflation rate at 2.25%, lower than the 2.5% level recorded in May.
The University of Michigan's July consumer survey showed declining 1-year inflation expectations, with 5-year expectations at their lowest level since March, according to the asset manager. UBS highlighted that June's Consumer Price Index data revealed core inflation declining month-over-month for the first time since 2020.
UBS Forecasts Diplomatic Resolution to US-Iran Tensions
The asset manager stated that investors should prepare for additional conflicts between the US and Iran, but predicted both nations will ultimately seek a diplomatic framework as economic pressures mount. UBS projected that oil prices will return to levels that can contain inflation.
Federal Reserve Expected to Cut Rates to 3%
UBS Asset Management forecasts the Federal Reserve will ease its hawkish stance and gradually reduce the benchmark rate to 3%. The firm cited a combination of a more moderate inflation environment and potential long-term labor demand slowdown due to increasing artificial intelligence adoption.
The asset manager emphasized that this projection is supported by current monetary policy already being restrictive, with inflation continuing to decline without additional rate increases.
US Treasury Yields Projected to Decline Through Year-End
UBS observed that US Treasury yields will decline for the remainder of the year, providing bond investors with attractive carry returns and potential capital gains. The firm's outlook is based on the continued easing of inflation pressures and the anticipated shift in Federal Reserve policy.
FAQ
What is UBS Asset Management's inflation forecast?
UBS Asset Management forecasts continued inflation easing, citing the 10-year breakeven inflation rate at 2.25% compared to 2.5% in May, and June CPI data showing core inflation declining month-over-month for the first time since 2020.
What Federal Reserve policy changes does UBS predict?
UBS predicts the Federal Reserve will ease its hawkish stance and gradually cut the benchmark rate to 3%, based on the view that current monetary policy is already restrictive enough to drive continued disinflation without additional rate hikes.
