Low inflation at any cost

Risk-loss propensity continued last week, with central banks remaining the catalyst.

Last week, the Bank of England raised rates by 25 basis points, and the Swiss National Bank surprised by raising rates by 50 basis points. In developed markets (DM), the Bank of Japan resisted the rate hike trend, leaving policy and interest rates unchanged. In emerging markets, Brazil raised rates by 50 basis points, Hungary beat expectations by raising rates by 50 basis points, and Taiwan failed to meet the targets, raising rates by only 12.5 basis points. The Federal Open Market Committee (FOMC), which has never been surpassed by the central bank, raised interest rates by 75 basis points, the biggest increase since November 1994. Not surprisingly, President Powell said at a June 15 press conference that he “do not expect movements of this magnitude to be commonplace. » Financial assets did not appreciate this increase, and government bond yields rose (except for Japan). With credit spreads widening last week, we saw US high-yield bonds underperform and emerging market investment-grade loans outperform in terms of total returns. In comparison, if today were the end of the year, it would be the worst year in terms of overall returns for investment grade credit markets since the creation of the ICE BofA indices.one. Shares are lower as DM underperforms emerging markets, even as commodity prices decline relative to market prices as a recession becomes more likely.

The takeaway from last week’s price action is that markets will remain very sensitive to inflation data. President Powell justified the anomalously high interest rate hike with stronger-than-expected consumer price data on Friday and the University of Michigan’s raised 5-10 year inflation forecast.2.

Secondly, we are now close to setting a ceiling interest rate in the US between 4.00 and 4.25%. US monetary policy has shifted from accommodating to restrictive; mortgage rates are at 5.94% (levels not seen since 2008), real rates are positive after only 3 years, and the market, which has outperformed the Federal Reserve in policy this cycle, is now forecasting a cut in the base rate in 2023. , with the Fed’s planned cuts starting in 2024 (see Citi Research weekly chart). In relative terms, US Treasury yields are currently not growing as fast as European bond yields.

Finally, the outpacing development of emerging markets in both the credit and stock markets is the result of diversification, in particular through Asia (which accounts for about 40% of global emerging market credit indices). There is less inflation worries in Asia, as evidenced by the actions of the central bank in the region this week. In addition, the two main drivers of growth in the region, Japan and China, continue to support economic growth through policy alignment and, in the case of China, further policy easing.

2022.06.22. Schedule of the week
Source: Citi Research data, Federal Reserve Bank, June 15, 2022.

This material should not be construed as a forecast, study or investment advice, nor does it constitute a recommendation, offer or solicitation to buy or sell securities or to follow any investment strategy. The views expressed by Muzinich & Co. are current as of March 2022 and are subject to change without notice.