The market narrative remains focused on a single topic – inflation – but the overall picture is markedly different to that of late 2022. Equity, credit and rates markets are not synchronised in their pricing or probabilities of the outcomes from here. This conflicting picture of significant rate cuts just around the corner, dovetailing nicely with median levels of credit spreads and a somewhat lofty equity multiple valuation backdrop, leave us asking: ‘Who is right?’
The main issue with having a view on inflation is the ever-present cacophony of short-term noise, much of it backward looking, leaving both investors and central bankers in a difficult position to champion long termism. That said, looking at what has been reflected in forward curves can be informative. Right now, the picture it paints is of a market that has priced in the prospect of inflation moderating, with interest rates cuts and looser conditions to follow in 2024 and 2025. Volatility in front-end rates is being sucked out, providing oxygen to the rally. Whisper it, but we believe there is now a decent chance inflation could be on its way to very low levels again, perhaps inside of 2%.
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