Inflation Watch: What Markets Are Really Telling Us

With tensions in the Middle East still ongoing and oil reacting to supply concerns around Iran, investors are again asking the right question: has inflation really been defeated, or is a second wave starting to form? We do not think the market is saying second wave yet.

Crude looks uncomfortable at first glance. Front-month Brent is near $94 after briefly spiking above $115. But oil alone does not set inflation. The key question is whether the shock is feeding through into expectations, refined fuels and rates. So far, it is not.

The cleanest signal is breakevens. The US 2-year breakeven is around 2.66%, still well below its March peak near 3.3%, while the 5-year is lower at roughly 2.55%. If markets were pricing a sustained inflation resurgence, longer-dated expectations would be rising. They are not. They are easing.

Refined fuels tell the same story. Inflation reaches households through gasoline and diesel, not crude screens. Gasoline has fallen from roughly 360 to 307, while diesel has eased from about 17 to 14.4. That matters because the pass-through channel is softening, not accelerating.

Rates confirm it. The 2-year Treasury near 4.02% against a 2-year breakeven of 2.66% implies a real yield close to 1.36%, which remains restrictive. Futures still price further easing rather than renewed tightening. The dollar near 99 is not confirming a broad inflation scare, and energy equities, after leading the initial move, have stopped confirming it as well.

What would change our view? A sustained 2-year breakeven above 2.9%, a 2-year Treasury above 4.5%, or Brent holding above $105. None of these levels matters in isolation. The real warning signal would be crude, breakevens and short-dated yields rising together. That would tell us the market is no longer treating this as a temporary oil shock, but as a persistent inflation shock.

For South Africa and Namibia, this matters directly. SARB has already hiked by 25 basis points, yet markets still price a 25 basis point cut in July and further easing thereafter. If a genuine inflation resurgence were underway, those expected cuts would already be disappearing.

Our conclusion is unchanged. Inflation remains above target, but it is not becoming embedded again. The dominant message from markets is not accelerating inflation. It is restrictive policy staying in place for longer. For now, the disinflation trend remains intact, and the recent oil shock still looks temporary rather than structural.