Dovish Rate Hike – Hawkish Facts

Weekly Comment | Fixed Income

The Fed delivered a 50bps rate hike as expected and this week’s CPI print will likely indicate that inflation has peaked. This is not enough for the market right now as the focus moves from “uncertainties in terms of peak level” to “the extent at which inflation can slow”, especially after inflation has infected the service sector, supporting the “permanent camp”.

Powell expects a stable unemployment rate in the range of 3.5% – 4% which would be an “OK” scenario. However, with job openings reaching a new all-time high in March (>11mln in March) and unit labour cost growth accelerating by >7% y/y during the first three months of 2022 the market has a hard time to believe in less inflation pressures coming from the job market.

EUR denominated IG yields have reached Covid-highs and credit spreads price in a recession. So far, the economic sentiment outweighs the under-risked positioning in global portfolios and the corresponding valuations.

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