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CROSS-ASSET WEEKLY
13.05.2022

Stagflationary Forces Are Gaining Ground

Summary
CAW
Macro: We have revised down our GDP growth forecasts as the war in Ukraine looks set to last longer than we previously assumed. In addition, China’s strict lockdowns will most likely weigh on global demand and further disrupt supply chains over the coming months. As a result, inflation rates are likely to remain higher for longer, which could lead to more persistent second-round effects. Central banks have little leeway to support financial mar-kets or the economy as they need to tighten policy rapidly in order to prevent a de-anchor-ing of inflation expectations. We now expect for this year three rate hikes of 25bp by the ECB, two 25bp hikes by the SNB, three additional hikes by the Bank of England and an-other 175bp worth of tightening by the Fed.  
Fixed income: The sharp repricing that has already taken place in developed markets rate structures and slowing global growth have improved the risk/return for government fixed income instruments, while the environment for credit remains difficult.  
FX: Against the backdrop of an elevated Fed policy rate trajectory and slowing global growth, we think that the dollar should remain strong in the near term. Moreover, we note that the Ukraine war puts commodity-linked currencies at a relative advantage through the energy price link, while euro and yen should continue to be adversely affected.
Equities: We remain cautious on equities, yet believe that the pressure on valuations will ease somewhat. In particular, the pressure on growth sectors should be more limited go-ing forward. Earnings, however, will likely see more downgrades and weigh on equity per-formance.  

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