Inflation Navigator – strategies for equities and credit

Surging commodity prices and rising inflation expectations rekindle taper fears. To taper or not to taper? This is perhaps the most pressing question facing financial markets these days and for good reasons. The timely combination of aggressive fiscal/monetary easing, supply shortages, and robust demand have finally rekindled inflationary pressure around the world. In the US, the 10Y breakeven rate has risen to 2.5% and this is coming on the back of broad-based price increases in the commodity world – from energy to base metals and agriculture.

To be sure, opinions on the outlook for inflation remain polarised. While the bond market is pricing in sustained prices gains ahead, the US Federal Reserve remains sanguine. Fed Chair Powell has signalled that the central bank is still “a long way” from withdrawing its ultra-loose monetary support and the committee has pledged to allow inflation to temporarily run above 2%.
Despite the Fed’s adamant stance in keeping policy loose, we believe the narrative may change should employment and inflation figures continue to ratchet up.