The market appears to have swallowed the Federal Reserve’s premise that increasing inflation is only temporary, but Peter van Dooijeweert of Man Group is skeptical. Van Dooijeweert, a managing director at Man Solutions who supports customers with multi-asset portfolios, told MarketWatch, “We, as a firm, are a little sceptical as to whether that narrative is going to hold.” “I disagree with the market’s belief that this is as temporary as it appears.”
After inflation, as measured by the consumer price index, came in hotter than predicted earlier this week, the yield on the 10-year Treasury note TMUBMUSD10Y, 1.299 percent, has remained low. According to van Dooijeweert, used cars were a major driver to the increase in inflation, reflecting higher costs due to supply problems with chips during the economic recovery following the epidemic. “I don’t think anyone expects used automobiles to remain incredibly hot,” he added, but he is concerned that the housing-related component of the CPI index will become “permanent.” Meanwhile, at a time when the US stock market is near record highs, the main tail risks he sees in markets are inflation and rates. U.S. markets end the day neutral after Powell reiterated his belief that inflationary pressures will subside. Last month, Fed policymakers hinted that the central bank could raise interest rates twice in 2023, according to their median prediction. Many investors believe the central bank would start decreasing its asset purchases early next year, making it appear less dovish. According to van Dooijeweert, if the Fed needs to “catch up” and become more active, faster, in curbing a rise in the cost of living, that might signal disaster for the market. According to him, the stock market in the United States is pricing in “blockbuster” economic growth and company earnings, while high valuations are becoming increasingly concerning to clients. Earlier this year, investors would frequently inquire about places in the market where they could earn a higher yield than bonds, according to van Dooijeweert. He claims that they are now focusing more on using options to hedge equity risk in their portfolios. During the first half of 2021, major US stock benchmarks saw double-digit gains. According to FactSet data, the S&P 500 index SPX, -0.33 percent is up almost 16 percent this year. “I think we need to be more aware of the downside risk than we have been in a long time,” van Dooijeweert added. “The scary part is that if the market realizes the Fed has to act aggressively and rapidly, the market can turn very quickly.” According to van Dooijeweert, another tail risk is that inflation could erode business earnings more than projected. In an inflationary atmosphere, people may become “so enthused about top-line revenue growth” that they overlook some “expense-line increase,” he said. Companies that “can’t control input costs are likely to suffer and struggle in the second half of the year,” according to the report. Prepare for peak earnings growth as the second-quarter numbers are released this week. Meanwhile, according to van Dooijeweert, the Federal Reserve has had “some pretty large success” in conveying a prospective slowing of asset purchases under its quantitative easing program. He explained, “The Fed managed to get the taper talk into the market without wrecking the bond market.” The yield on the 10-year Treasury note decreased about 6 basis points to 1.297 percent on Thursday. Bond prices and yields move in opposite directions. Read more about Inflation is going to subside. Just take your time. Evans of the Chicago Federal Reserve says/n
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