Articles by Chun Wang Director of Multi-Asset Strategies

The CPI numbers surpassed already-high expectations. There are reasons to believe inflation has probably peaked and the pricing for Fed rate hikes will likely come down.

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Lofty valuations amid shrinking liquidity conditions make all risky assets vulnerable.

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The market has started to price in a much faster pace of the Fed’s tightening this year. We have found more similarities than differences between recent market action and the historical patterns around the first rate hike.

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The CPI numbers suggest inflation is broad-based and less transitory than expected. Our Scorecard starts to tilt a bit toward a cost-push inflation regime, caution is warranted. Watch the yield curve closely.

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The impact of Omicron is already fading and the global-tightening cycle is far more important going forward. Elevated valuations amid a broadening global-tightening cycle is our key concern.

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Market revelations were certainly not in short supply in 2021. We believe some of those surprises will continue to have a huge impact on markets in 2022. We have updated our time-cycle composites to provide an idea of what a “typical” 2022 could look like.

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With the market getting less sensitive to each iteration of new variant, we believe the impact of Omicron is unlikely to be as significant as the global-tightening cycle.

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There has been a torrent of new policies coming out of China recently. The goal of this report is to disentangle these seemingly random or even nonsensical policy moves and present a clearer roadmap of what China is thinking and doing.

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The CPI numbers were well above market estimates. The futures market quickly moved on to price in a Fed hike in June 2022. Inflation will persist for a while longer but we refrain from extrapolating the current trajectory too far into the future.

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With seasonality once again turning positive and inflation breakeven rates bumping above the recent range, we continue to favor the reflation trade.

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We believe concerns about central-bank policy error are mostly a foreign issue, because they have moved much more aggressively than the Fed. The market has shown no indication of a Fed-policy mistake and we are still on board with the reflation trade.

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The CPI numbers are slightly above market estimates. 
These numbers gave the Fed the “all clear” to taper.
Scorecard still points to higher inflation.

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Elevated valuations and a global tightening cycle are usually not a favorable context for risky assets. Within fixed income, we remain positive toward TIPS and cautious on credit.

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The Citi Economic Surprise Index fell to a negative extreme, while the Citi Inflation Surprise Index made all-time highs—a “stagflation” gap. Overall, if history repeats itself, the extreme ESI-ISI gap is apt to resolve itself, and the effect on asset markets will likely be limited. The global tightening trend will be a far more persuasive driver.

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The reflation trade stayed in a holding pattern with breakeven rates remaining range bound. Within fixed income, we are favorable toward TIPS and cautious on credit.

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We take a look at how the market rewards different uses for cash and what drives management decisions about the use of cash over time. The focus here is on the three main cash applications: investment (Capex and R&D), return of cash (via buybacks and dividends), and M&A spending.

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The weakness in Value* over the last few months has gotten a lot of attention (Chart 1). While we are still on board with the “Value trade” in general, a subtle but distinct change within the theme has emerged. There is a clear bid for Quality, which had not happened in the massive post-Covid junk rally until recently.

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The CPI numbers are in line with market estimates. These numbers are unlikely to alter the Fed’s view on the upcoming taper. We continue to give the reflation trade the benefit of the doubt.

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Our Risk Aversion Index moved higher and generated a new “Higher Risk” signal. Within fixed income, we are favorable toward TIPS and cautious on credit.

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What matters is whether an inflationary period is driven more by “demand pull” or “cost push.” Demand pull inflationary periods seem far more favorable than cost push periods, which, more often than not, occur in a “stagflation” macro context.

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