Highlights:

• The policy unwind will be slow, while economic growth will stay above potential in 21H2.
• US inflation has surged. The shock is partly transitory, yet inflation may not return to the very muted pre-Covid trends. The Fed will navigate between the opposite risks of unplugging policy support too quickly and losing control of inflation expectations.
• The Fed’s new strategy lacks clarity and occasional re-interpretation will cause volatility, calling for stronger use of hedges. We still expect the cautious approach to support a slow transition from early to mid financial cycle.
• The rising stock-bond correlation is bad news for diversification. We retain a positive risk stance but scale down our equity overweight, both in size and structure (long Value vs. Growth). Credit remains a good carry trade, even at that level of spreads. We recommend UW Govies and short duration.

Download the full publication below