Originally, the US and Europe expected a significant decline in inflation rates for this year, a prospect justified by the phasing out of base effects and improving supply chains. “This decline will likely be significantly delayed”, Gerlinger pointed out. The Ukraine war is causing the already high commodity prices to continue to overshoot, and the US labour market is already observing a structural wage-price spiral.

The US Federal Reserve currently expects an inflation rate of 4.3 per cent for 2022. To curb inflation, the Fed already raised its benchmark federal-funds rate and announced further rate hikes. The median member of the Federal Open Markets Committee expects the Fed Funds rate to be 1.9 per cent at the end of 2022. Additional rate hikes totalling 100 basis points are expected for 2023. The European Central Bank, in turn, expects inflation to reach 5.1 per cent this year and 2.1 per cent in 2023. “Nevertheless, a rate hike is likely this year”, Gerlinger said. “In the medium to long term, inflation rates will settle at a level that is quite a bit above pre-corona levels”, Gerlinger predicted. A value between four and five per cent is to be expected for the US, while it should be between three and four per cent in Europe.

In terms of currencies, the US dollar recently strengthened, benefitting from its image as a crisis currency. The prospect of faster and stronger increases in US key interest rates also added a strengthening effect even though the likelihood of an earlier, more restrictive ECB course simultaneously increased. “The dollar remains caught between unchanged fundamental overvaluation, rising US budget deficits and likely widening interest rate differentials”, Gerlinger explained. It remains heavily supported and in the context of further geopolitical escalation could even strengthen further in the short term.

The price of gold also benefited from the outbreak of the war in Ukraine, with the precious metal additionally being supported by higher inflation expectations and negative real yields. According to Gerlinger, “gold is currently a hedge or diversification asset”.

On the interest rate side, yields on US government bonds showed heavy fluctuations lately: inflation concerns on the one hand, and a flight to safe havens with regard to Ukraine on the other. A further rise in yields is expected in all maturities, with a tendency towards flattening the yield curve closer to the end of 2022. “In view of the inflation trend and the continued robust economic situation, a further rise in yields would fundamentally be justified”, Gerlinger emphasised. In relative terms, US securities remain comparatively attractive due to the absolute yield level, apart from the interest rate risk.

Bunds, on the other hand, will likely remain unattractive for some time to come. They are only a safe haven in risk-off mode. The bond market continues to be distorted by the ECB’s ongoing bond-buying programme. As far as European corporate bonds are concerned, an increasing widening of spreads has recently been observed due to the significantly rising inflation and the geopolitical situation. The expiry of the ECB bond-buying programme could lead to further widening of spreads for corporates. If the geopolitical situation calms down and inflation rates do not continue to rise, a narrowing of spreads will be possible again. Emerging market securities are also attractive: “Above all China because of relatively low inflation and an expansive monetary policy”, Gerlinger concluded.

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