Unlike the last few years, this summer was relatively quiet. As markets look ahead to the rest of the year, the key theme will continue to be the major central banks’ tentative progress toward removing monetary accommodation. Investors have so far not priced in this outlook. Since the prospects for growth across all the major countries is better than it has been for some time it remains a puzzle why there hasn't been a greater sell-off in bond markets.
The failure of inflation to rise to the central bank targets of around 2% is only part of the explanation. Geopolitical and political risk have also played a role. But the latest data in the US have started to ease fears of a persistent low inflation scenario, and this should prompt a further move higher in rates as the tightening path for central banks becomes easier.
A gradual repricing of rates should not prove disruptive for risk assets, as it reflects a strong macro backdrop. But a sharp rise in rates, precipitated by a more meaningful pickup in inflation which reveals that central banks may be behind the curve, could be highly disruptive to asset pricing generally. 2013’s taper tantrum provides an example, with US rates rising 140bp in 8 months and wiping billions off risk asset valuations.
David Folkerts-Landau, Group Chief Economist [mehr]