Interest rates – higher for longer

Bond yields rose last week as the market absorbed the Central Banks determination to keep short term rates higher for longer in an attempt to kill the inflation impulse.

Markets believe in the short term that Central Banks will raise interest rates once or twice more but are certainly convinced, in the longer term, that inflation will fall to an average of 2.15% over the next five years.

The Institute for Supply Management (ISM) conducts research and publishes reports on supply management-related topics, including industry trends and economic forecasts. From their research we can see that interest rates rose much stronger than expected:

ISM services index53.9 v. 50.0 expected
ISM services employment53.1 v. 49.1 expected
ISM services business activity59.2 v. 51.2 expected
ISM services new orders55.5 v. 52.0 expected

Arculus Funds Management says in their weekly note: “Our view remains that the Federal Reserve will only increase rates again in this cycle once PCE core prices begin to rise again. The inconvenient reality is that we may see the US economy enter a prolonged period of slower growth and higher inflation. This is not stagflation, but it will be challenging of any business, individual or government with high debt levels that can only be successfully managed when earnings, income and tax revenues are strong. A possible scenario will see the Federal Reserve remain on hold due to the extended period of high inflation. This week the US inflation data will be the key data release. The market is forecasting that headline CPI will fall to 3.2% and core inflation to 5.0%.”

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