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The direction and magnitude of changes in euro area core producer price indices have tended to lead the core consumer price index by 6 to 9 months. A sharp easing in price pressures looks likely in coming months.

Euro area inflation is (probably) headed down.

Price indices, % annual change

Inflation pressures - as measured using the New York Fed's "Underlying Inflation Gauge" are trending solidly downward, suggesting that relief could come in the next few months, even if May's data remains elevated.

US inflation could come down even faster.

Personal Consumption Expenditures indices and Underlying Inflation Gauges, % annual change

Recent increases in initial claims numbers might be statistical noise, but a modest rise in unemployment could be underway.

And labour markets look likely to soften.

Initial Claims, thousands, seasonally adjusted

Markets are convinced that slowing growth and inflation rates will negate the need for further monetary tightening in the autumn months, and are betting that long-term rates will remain relatively low.

But financial conditions are easing once again.

Bloomberg Financial Conditions Index, % annual change

Japanese officials are using language that has historically preceded intervention efforts - raising concerns about "one-sided" currency moves and warning that "no options can be ruled out". But with the Chinese yuan depreciating in synchrony, we don't expect yen buying to approach historic levels.

Japanese intervention should be restrained.

Change in nominal effective exchange rates, %

With major central banks sidelined and economies entering a "muddle through" scenario, we think carry trade activities could enjoy a renaissance, with the yen providing an ideal funding vehicle. Shifts in financial flows could therefore overwhelm deeper fundamentals for many months to come.

And carry could become the dominant driver.

Real government bond yields, %, calculated as difference between nominal 10-year yields and 10-year breakevens
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