Below is a chart and brief excerpt from today's Early Look written by Senior Macro Analyst Darius Dale.
Our ~50 geography specific nowcast models have each incorporated 1-2 months of reported INFLATION data for 2Q20E and it’s no shock to see 100% of them currently anticipating disinflation for the quarter. That figure is likely to give way to readings in the area code of ~35% over the next few quarters, which implies most economies will be experiencing reflation throughout.
On balance, the breadth of that upside momentum is broadly negative for duration risk, at the margins. Moreover, the durability of that catalyst is partially why we’ve seen such a persistent bid for EM dollar debt in recent months and an accelerated push into local currency securities of late amid the bearish TREND breakdown of the DXY.
Recall that EM credit generally tends NOT to work in Quad 3, per our GIP Model Market History Backtests. The only conditional factoring Quad 3 scenarios where EM credit works on an excess return basis are “Narrow Quad 3”, “Quad 3 Fed Tightening”, and “Quad 4 to Quad 3”, outperforming in the latter two scenarios because of the obvious duration risk – which the FOMC reiterated its commitment to contain yesterday.