What a week in Fixed Income space! The bloodbath after the hot US CPI report partially continued today, but equities have a tremendous ability to recover fast after inflation/rate shocks these months as the anticipated lean from central banks remains dovish.

In this short G3 rates watch, we take a practical stance on the R* concept. If an economy can re-accelerate given current rate levels, it seems likely that R* is even higher than thought by many economists including the entire ilk of PhDs at the Federal Reserve.

The two most used academic approaches to R* have moved in exact opposite directions since 2022, which goes to show that no one has a clue. Yet the market seems very hellbent in leaning dovish in forward pricing despite an evident ongoing re-acceleration of the cyclical components of the economy.

What does that mean for rates markets in the months ahead?

Chart 1: No one’s got a clue on the equilibrium rate level