MacroResearchBoard

A Challenging Backdrop – May 9, 2022

A just-published report updated our multi-asset recommendations, highlighting the ongoing risks of further losses in all asset categories. Central banks massively misread the underlying inflation backdrop, and now are claiming they will try to catch up by hiking interest rates at an historically rapid pace. This, in turn, has triggered broad-based selling in risk asset markets.

Equities are still benefiting from a positive earnings backdrop, due to good economic growth and elevated profit margins. However, this effect has been more than offset by a major de-rating of global equity markets as investors adjust to much higher bond yields and rising expectations for policy rates. The starting point of record low nominal and real bond yields and short-term rates means that inflation is unlikely to be tamed until much higher levels are reached. Indeed, real yields have risen of late, but to levels that are still well below those seen last decade, when inflation was still in hibernation.

Net: stay cautious in the near run, risk asset markets will remain weak and extremely volatile until the rise in bond yields pauses. Stay tuned.