Highlights:

• There is a slightly scary side to being at both peak policy and peak growth. Do not exaggerate it, however. 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 we have good reasons to believe that inflation will 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 AIT mandate lacks clarity, and occasional re-interpretation will cause hiccups: beef up hedges. Yet the June FOMC is testimony to its communication skills; expect the cautious approach to support a slow transition from early to mid financial cycle. In particular, we find it premature to chase yield curve flatteners.
• 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, but less keen on Cyclicals vs Defensives). Credit remains a good carry trade, even at that level of spreads. Stay short Govies and duration. Reduce USD bearish trades.

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