Exaggerated inflation concerns?

Panic about rising inflation figures and the outlook for sharply rising key interest rates dominate the daily press. The assessment of interest rates and inflation is one of the cornerstones of our assessment of the situation, as the interest rate level has a decisive impact on the individual asset classes. We do not share the current fears and come to the conclusion, based on our own valuation models, that there will be an easing of the situation in the course of the year. Thus, we see an exaggeration in market expectations in the current situation and assume a less pronounced rise in interest rates and a decline in inflation data in the current year.

The influence of interest rates on the different asset classes is great: in the area of bonds, for example, directly on their price development, and in the case of equities, commodities and precious metals on the valuation or the attractiveness of the investment. In the case of currencies, the interest rate differential provides important indications of future developments. Our assessment of the interest rate situation includes an analysis of the economic environment, an assessment of central bank policy and an analysis of historical contexts.

Resumption of the historical correlation between economic activity and interest rate levels

In the years before the COVID-19 pandemic, there was a strong correlation between the development of the long-term interest rate level and the leading economic indicators. The stronger the economy, the higher the interest rate level and vice versa. The Corona pandemic has disturbed this historical relationship in the meantime. We assume that the correlation between the economy and the interest rate level, which has existed for years, will be re-established with the end of the pandemic. Thus, there is potential for interest rates to continue to rise in the short term, even with a weakening economy.

In the period before the financial crisis (2008), central banks mainly determined the short-term interest rate level. With the introduction of bond-buying programmes (quantitative easing) after the financial crisis, central banks also managed to influence longer-term interest rates. In view of the still solid economy and strongly rising inflation figures, central banks fear that the economy is overheating, which leads them to raise key interest rates and reduce the quantitative easing. The currently planned reductions of this quantitative easing will thus influence the interest rate level.

Inflation fears are not justi

Our inflation expectations are not driven by emotions and do not share the current hysteria but are based on the expectations of financial market participants. These can be calculated from the difference between nominal yields and real yields for different time periods.

The currently very high consumer prices are prompting the central banks to raise key interest rates and thus favour a higher interest rate level, at least in the short term. However, some of these inflationary forces, such as the production bottlenecks, are only of a temporary nature and will lead to a decline in consumer prices in the course of the year. The long-term expectation of future inflation figures (see chart 3) shows a significantly lower level but remains above the level of 2 per cent desired by the central banks.

The economic slowdown that we expect in the second half of the year will lead to an additional easing of interest rate pressure and give central banks the opportunity to refrain from further aggressive interest rate steps. The interest rate steps currently being priced in by market participants (more than five) are exaggerated and will also ease the longer-term interest rate level in the course of the year or lead to a less pronounced rise in interest rates compared to the current market assessment.

More than five interest rate hikes are priced in this year in the US

Number of interest rate steps derived from the "Fed Funds" forward contract for December 2022

Source: Refinitiv Datastream, Colin&Cie

Disclaimer - legal notice

This publication was produced by the Investment Office of the Colin&Cie Group. The information and opinions contained in this document are based on sources we believe to be reliable. However, we cannot guarantee the reliability, completeness or correct-ness of these sources. All information and quoted rates are only up-to-date at the time of this publication and are subject to change at any time without notice. The content is based on numerous assumptions made by the Colin & Cie Group. It should be noted that different assumptions can lead to materially different results. The forecasts and assessments are only current at the time this publication is prepared and can change at any time without prior notice. Past performance of an investment is not a guarantee of future results. Certain investments can experience sudden and substantial losses in val-ue. This information and views do not constitute a solicitation, offer or recommenda-tion to buy or sell investment instruments or to carry out any other transactions. We recommend interested investors to consult their personal advisor before making deci-sions on the basis of this document so that personal investment goals, financial situa-tion, individual needs and risk profile as well as further information can be duly taken into account as part of a comprehensive consultation. The information contained in this publication is marketing material that is distributed for advertising purposes only.