According to Jean-Paul Jaegers, head of asset allocation at Barclays Wealth & Investments, concern about the central banks’ selling point is soaring.
Major central banks around the world have been tightening monetary policy and raising interest rates to try to contain runaway inflation in recent months.
However, some stock markets staged a slight recovery last week on hopes that the substantial rate hikes already in place would mark the peak of aggressive tightening by policymakers as they walk a tightrope slack between containing inflation and a backdrop of slowing growth in many major economies.
When asked if the market had a “dangerous concern about the point of hawkishness” – or when central banks stop raising rates – Jaegers said: “Yes, it probably is. We actually think, reading the economic data recently, I think it’s probably too early.”
European markets were mixed on Monday and U.S. stock futures entered cautiously positive territory as investors braced for a deluge of corporate earnings and looked ahead to the Fed’s monetary policy decision on Wednesday.
However, Jaegers predicted that it may be months before central banks are comfortable enough with the path of inflation to take their foot off the pedal from monetary policy tightening.
“We see now that as investors we’ve been talking for a long time about the stagnation scenario, so activity is slowing down and inflation is actually quite sticky. We see that inflation remains quite stubborn and more rooted in some elements,” he told CNBC. “Squawk Box Europe” Monday.
“We think they [central bankers] They’re going to need a little bit of time for the inflation to really die down and for them to feel comfortable putting their foot on the pedal … that’s going to take a few months when they’re comfortable enough with the inflation.”
For financial markets, however, this eventual pivot may offer an opportunity, he suggested.
“Especially what we’ve seen with the equity markets and particularly with the fixed income and credit markets so far this year, the declines have been quite significant, so I think there will be some relief for investors if they think inflation has occurred. it occurred to some extent,” Jaegers said.
The European Central Bank became the latest to begin its tightening cycle, surprising markets on Thursday with a larger-than-expected 50 basis point hike in interest rates, with inflation the euro zone at a record 8.6%.
However, the continent faces multiple external shocks weighing on growth, notably the war in Ukraine and concerns over energy supplies, along with renewed political turmoil in Italy.
“The economic context in Europe has deteriorated quite a bit and then also the clouds with Italy and a war on its doorstep make it a very complicated picture for Europe,” Jaegers said.
“We actually think Europe is going into recession and the ECB will probably find it very difficult to raise policy rates enough in the face of slowing economic growth.”
The US Federal Reserve is expected to opt for a second consecutive hike of 75 basis points this week, with inflation at 9.1%. However, PMI readings and US employment figures last week also indicated a slowdown in economic activity.
Jaegers also expressed concern about recession risks in the US, as interest rates, which started the year between 0 and 0.25%, are expected to reach 3.5% by end of the cycle, along with a very strong dollar and other tightening financial conditions. .
“So in the last few weeks we’ve become more cautious with these assets and more comfortable with having more duration risk, so more government bonds, in client portfolios. We think it’s very difficult from here that rates of long-term interest really go up, and that also accounts for Europe,” said Jaegers.