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CROSS-ASSET WEEKLY
01.10.2021

Central Banks Are Becoming More Vocal as Inflation Rises

Summary
Cross asset weekly pic
With the current rise in inflation apparently less transitory than expected, central banks are pivoting to a slightly less dovish stance. The Fed had shown more rate hikes in its dot plot for 2024 last week, while the Bank of England, worried about inflation expectations becoming unanchored, has fired up speculation about a timelier policy rate lift-off. This has spilled over into euro area rates markets, where expectations for short-term rates have started to rise as well.
Higher rate expectations are pushing up long-term bond yields, at a time when economic growth rates are generally slowing from the post-pandemic peak. Still, fears of stagflation in the US look overdone. There is a good chance that the post-pandemic world will see higher productivity growth, which should help keep a lid on inflation even in the face of higher wages.
Fixed income markets, such as euro area government bonds, find themselves in a difficult spot, at least for now, with unattractive returns in an environment of rising rates, while commodity-linked currencies are set to benefit from strong commodity prices and a more hawkish rate outlook. Equity markets, on the other side, are entering more difficult terri-tory as earnings revisions are coming down and real rates (in the US) have risen, both of which have been important drivers for the strong equity market performance so far.
Finally, we note that the German election outcome is indicative of a continuation of centrist policies and political stability.

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