Summary

Inflation, and whether or not it is transitory, continues to be a hot topic. In 2021, market signals consistently indicated that inflation would be transitory and that we would remain in a low inflation environment. Markets remain all in on the lower forever rate story.

However, the force of secular stagnation is weakening and this is on the back of three key trends. Fiscal Policy is growing in importance in terms of stimulation the economy when compared to Monetary Policy, Central Banks are no longer able to accurately forecast inflation and investment spending is expected to increase. Given that force of secular stagnation is weakening and that all economic indicators point towards a US economy that is not as rate sensitive as markets perceive, Minack believes that the Fed Funds Rate should be pushed to a peak of 4% as opposed to the consensus of a 2% peak Funds Rate.

What does this mean for markets? The market has been sceptical of the sustainability of reflation, but reflation trades will make a reappearance this year. Equities tend to de-rate when the Fed embarks on a tightening cycle and market volatility is inevitable. However, equities will continue to outperform bonds, albeit at modest returns compared to a Fed easing cycle. Ultimately, this is a dangerous environment for low yield assets. But overall, equities will generate positive returns even if the most speculative part of the market starts to generate losses.

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