30 MAY, 2022
By Vincent Chaigneau
Investors' minds are switching, with inflation fears past their peak as recession concerns simmer. US 5y5y inflation has lost some 20bp from the early May peak to now 2.65%. It is down 40bp to 2.10% in EUR. Global growth is cooling, and this is impacting cyclical commodity prices, e.g. base metals (chart).
Fed hike expectations are receding, e.g. the implied FF for Sep. 2023 has cooled from 3.40% early this month to 2.90% now. This is part of the self-correcting mechanisms -concerns about growth and financial stability -supposed to cap 'risk-free' yields. This process is helping risk assets to find a floor, and selected Bull/Bear sell-side indicators are flashing BUY.
Yet we find it premature to reload much risk (we are long IG Credit, but not Equities nor HY just yet). For now markets still face the combination of soft economic data -e.g. the US manufacturing ISM should fall towards 50 this summer -and central banks walking their hawkish talk.
We expect the latter to start turning less aggressive by late summer as softer growth caps inflation forecasts. For now risk assets are also still facing a tense geopolitical environment (Russia/NATO, Taiwan) contributing to elevated food and energy prices -not great for the consumer.