MacroResearchBoard

Financial Assets Are Hostage To A Central Bank Pivot – June 20, 2022

In last week’s research we updated our outlook for the global economy, monetary policy and multi-asset investment strategy in response to the ongoing hawkish shift in U.S. and G7 interest rate expectations that is undermining economic confidence and sending tremors through financial asset markets.

Our research and frameworks have consistently shown that the material outbreak of consumer price inflation would prove stickier than central banks and most investors perceived. This emboldened us to lean against the last year’s “transitory” narrative, call for the Fed and ECB pivots, and warn that policy rates/bond yields would need to rise substantially to cool inflation. That said, the speed of capitulation by central banks and bond investors towards our view has been remarkable, causing the bond market to become disorderly in its adjustment.

The consequence has been a further punishing of risk asset markets. Global equities are now deeply oversold after slipping into bear market territory. Although there is still room for near-run earnings disappointments and downgrades, the consensus view for a pending global recession is still premature at the current global current cost of capital. Nonetheless, a sustained recovery in risk-taking will require a calming in hawkish central bank rhetoric and a material subsiding in bond market volatility. Stay tuned.