Fears of stubborn inflationary pressures in developed markets led financial markets to price in an earlier start of the interest rate hiking cycle in October. As a result, government bond yield curves flattened quite meaningfully, with short-end yields rising and the very long end of the curve falling.
Many investors are worried that inflation persistently above target will force central banks to hike policy rates against a background of slowing economic growth. We continue to believe that inflation will prove transitory and expect central bankers to push back against market pricing that looks too hawkish, in our view. In the short term, many investors are also worried about the impact of higher commodity prices and supply chain bottlenecks on company earnings. Third-quarter results have exceeded expectations so far, with corporates largely offsetting increased input costs with higher output prices, with little impact on sales volumes. Better-than-expected earnings, an extension of the US debt ceiling deadline and moderating fears around China led the “buy-the-dip” mentality in equities to resurface. Despite that, credit spreads widened slightly in October, as interest rate volatility weighed on the asset class. Looking ahead, we expect credit spreads to move largely sideways. As for interest rates, we expect longer-term ones to rise moderately, while short-end rates should stabilise after the recent spike.
