A temporary reversal for the reflation trade
This is an excerpt from our equity outlook - a temporary reversal What are the risks? Too many incentives in the US can mean that inflation expectations are no longer anchored, forcing the US Federal Reserve to hike key interest rates sharply. However, the markets do not currently reflect such a scenario. The Fed has continued to stress that it is happy with the expected rise in inflation and is in no rush to hike rates. This explains the recent reversal in nominal US bond yields. Medium-term inflation expectations have eased slightly, possibly due to the impact of rising taxes on growth after the debt-driven stimulus. The details of the Biden Administration's broadly defined infrastructure packages will be of critical importance. The size of the expense and the degree to which it is paid through higher corporate and personal taxes or further debt issuance will determine the extent to which bond yields, that is, market rates, will rise. The continuing potential of value stocks...