5 to 11 February: Growing Pains

After the volatility explosion of the past 2 weeks, which came after 2 years of market calm and serenity, it would be easy to get carried away. However, the outlook can really be distilled to a single question:

Is enough inflation building to prompt a monetary tightening that will derail the (booming) global economy?

In a word, our answer is no. As we have repeated over the past few weeks, the US (where there is the greatest potential for higher rates) is later cycle than most peers and therefore not a fair proxy for the rest of the world. Indeed, even stateside inflation expectations remain relatively subdued (the 5Y5Y forward inflation swap roughly unchanged over 12 months at 2.39%). However, we should be equally clear that the market has entered a new, more volatile, regime. Central bank liquidity will now be biased to tighten, and every strong data print will have investors considering the negative implications of overheating and inflation. Our judgement is simply that (for now) the build up of such headwinds will be modest and insufficient to stop growth in its tracks.

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