A just-published report addressed a number of timely investment issues, including the hardening in expectations that the Fed is now close to ending its rate-hiking cycle. The timing of this change was crucial, because G7 10-year government bond yields were on the verge of breaking out to new highs for the current rate-hiking cycle, creating a roadblock to further equity market gains.
Last week’s soft U.S. CPI report was the catalyst for the shift in sentiment, but we expect hopes for lower policy rates to be (once again) dashed. Global economic resilience and extremely tight DM labor markets point to core inflation levelling off by yearend well above both pre-pandemic levels and central bank targets.
We still remain tactically positioned for risk-on with tight stops, but expect a deterioration in monetary conditions once bond investors realize that the 2% inflation world is going to be unreachable until the next recession. Critically, year-on-year inflation comparisons will turn from bond-friendly to bond-bearish beyond the near term – stay tuned.