US inflation is at its peak – Reactions from wealth managers

After more than a decade of rock-bottom interest rates and asset allocations that shifted to chase yields, the wealth sector must contend with how a “new normal” of high inflation will change some of its assumptions.

Yesterday any notion that consumer price inflation in the US would soon start to fall was shattered, with official figures showing the CPI rising 7%, a 40-year high. A mix of supply chain disruptions and massive central bank money-printing, creating lots of money for the pursuit of often limited goods and services, had an impact. How temporary or permanent this will be, and what the US Federal Reserve will do, arguably remains the dominant asset allocation call for this year. Inflation could even cast popular themes such as ESG investing into the shadows. The old monetary policy arguments that raged in the 70s and 80s may be making a comeback. This news service intends to explore the changes in asset allocation that an era of higher inflation might necessitate. For example, where does that leave the big push in private market investing that has been a talking point in wealth management in recent years?

Here is a series of reactions from wealth managers and economists to the US figures.

Brian Nick, Chief Investment Strategist, Nuveen
the [US] The Fed also appears poised to embark on quantitative tightening as early as the second half of this year. The extent of this potential tightening remains uncertain, as the Fed has not specified how quickly it will allow stocks to pull back or what the final size of its balance sheet should be.

Equity markets have started 2022 with a sharp shift in leadership from defensive and higher growth stocks to cyclical and value names. Energy stocks are off to a strong start while financials benefit from higher rates and a slightly steeper yield curve.

Credit markets are doing well despite rate volatility. Nuveen expects the rise in early 2022 to be no exception. The US Treasury curve may steepen further, with the 10-year yield ending near 2.5% for the year.

Mark Haefele, Chief Investment Officer, UBS Global Wealth Management
We expect the US 10-year yield to decline from the current level of 1.73% to around 2% over the next few months as investors assimilate the Fed’s more hawkish stance as well as inflation numbers. even higher. That said, we don’t expect a big jump in yields that would jeopardize the rally in equities.

Jack Janasiewicz, Portfolio Manager and Senior Portfolio Strategist, Natixis Investment Managers Solutions
Excluding pandemic-affected services and vehicle-related issues, inflation continues to remain contained, albeit at higher levels. We are about to enter a period where the base effects will also start to be felt. Year-over-year comparisons will be very difficult to match given the impacts of the base effect. This will start to make these year-over-year competitions very difficult and will likely lead to weakening numbers. Just simple math at work.

But even if these base effects are starting to challenge the footprints of inflation, the tightening of financial conditions should also start to help. Markets have forecast nearly four rate hikes for the Fed by the end of 2022 and three more by the end of 2023.

In addition, the winding down has been accelerated and talks of winding down the balance sheet are now front and center, with some pundits calling for the outright sale of purchased assets later in the year.

March almost made a rate hike by the Fed a foregone conclusion. June isn’t far off either. But combine that with base effects, COVID-related improvements in supply chains and labor markets, the Fed’s tough rhetoric on inflation, balance sheet management, and modest fiscal tightening and we could very Well see inflation prints starting to soften at a pace that some are not expecting.

A lot of hawkish takes abound right now regarding monetary policy and inflation. And while the Fed continues to talk tough, it’s also trying to buy time and let the economy normalize.

e and the data shows persistent inflation before moving to a more aggressive tightening campaign highlighted by rate hikes. Remember that it is the current market price that matters. And there is a lot of warmongering at the current level. May be too much.

Silvia Dall’Angelo, Senior Economist, Federated Hermes International Affairs
Looking ahead, US CPI inflation may peak over the next two months before beginning a gradual descent in the second quarter. Base effects, stabilization (or even moderation) of energy prices and, above all, an easing of supply constraints should contribute to lowering inflation in the second half of the year. That said, a great deal of uncertainty still surrounds the inflation outlook. In the short term, the combination of Omicron and China’s zero COVID policy has the potential to intensify and prolong global supply chain disruptions, leading to lingering inflationary pressures.

Today’s inflation report provides further validation of the Fed’s recent hawkish pivot. As Chairman Powell reiterated during his confirmation hearing yesterday, inflation is now seen as the main threat to the economic outlook and the Fed stands ready to tighten sooner or faster if needed. As inflation continues to be high and the labor market seems tight, the Fed could well use the option offered by an early end to its QE program and increase as early as March. In addition, the Fed is expected to resort to quantitative tightening in the second half of this year – much earlier than in the previous cycle.

Dolores W. Simon