Economists warn: markets are shaken by interest rate and inflation concerns
Deutsche Bank economists warn of a dangerous combination of a jump in bond yields to 5.3%, high oil prices, and uncertainty surrounding new sanctions, which threatens risk assets and inflation.
According to a review by Deutsche Bank economists, the recent shift in market attention toward interest rates is intensifying as fiscal concerns push long-term bond yields upward, testing the resilience of risk assets. Higher energy prices are complicating the inflation outlook, while investors are re-examining profit expectations related to artificial intelligence.
The rise in the yield of 30-year US government bonds toward 5.3% indicates that concerns about the volume of government debt issuance and the rise in the term premium are outweighing the short-term support expected from the US Treasury's buyback program. Higher market interest rates are tightening financial conditions and raising the hurdle rate required to justify investments and stock market valuations.
"However, as we discussed in our Chief Investment Officer (CIO) special report, 'US Deficits: A New Twist in Wicksellian Theory', the wide gap between the yields generated by US companies and the natural interest rate continues to support investment and demand for US assets," the experts note.
High energy prices add uncertainty, with Brent crude oil trading above 93 dollars per barrel. Markets will closely monitor the latest US sanctions measures against Iran and developments around the Strait of Hormuz, as any prolonged disruption in energy flows could increase inflationary pressures and keep long-term bond yields at high levels.
Moving forward, markets will focus on the Jackson Hole symposium (August 27–29), any clearer US plan for fiscal consolidation, US core PCE inflation data, developments around Iran and the Strait of Hormuz, and the financial reports of a leading chip company considered an industry barometer.
USA: Key tests for growth and inflation
The housing market and broader economic activity will be in focus this week as investors assess the resilience of growth momentum heading into the second half of the year. Housing data released on Tuesday is expected to provide an up-to-date snapshot of housing demand. New home sales in July are expected to rise slightly to an annual rate of 630,000 units, compared to 628,000 previously, while the number of building permits is expected to fall to 1.41 million from 1.44 million.
Attention will then shift to the second estimate of GDP for the second quarter, to be released on Wednesday. Growth is expected to remain at 1.5% compared to the previous quarter and 2.1% year-on-year. PCE inflation data for July, released the same day, is expected to show that the monthly price growth rate moderated to 0.2% from 0.3% previously.
On Thursday, wholesale inventories are expected to rise by 0.3% in July, following a 0.2% increase previously. The week ends on Friday with the Chicago PMI for August, expected to rise to 57.9 from 57.6. Overall, GDP and PCE data will be the key tests this week for growth and inflation momentum.
