We expect US headline inflation to rise in the coming months from 2.1% in January to a figure close to 2.8% in July.
This rise would be mostly due to base effects on energy and should be followed by a slowdown to circa 2.2% around yearend. Core inflation (ex-energy) is expected to rise slowly from 1.8% in January 2018 to 2.4% in December.
Markets could continue to review their inflation expectations upwards moderately, but we do not anticipate any sharp move further. Long term disinflationary factors such as demography will continue to weigh on expectations for a long time.
Nominal yields could continue to rise moderately, but we think valuations are now close to fair value on US government bonds.
In our scenario, Fed hikes in an orderly fashion, which enables equities to continue to rise thanks to strong EPS growth and not too expensive valuations.
We think European equities should do well in this environment, but their performance might be hampered by a stronger Euro.