Soft landing narrative may see risk run riot unless inflation heats up

Market chart showing uptrend
David Scutt 125
By :  ,  Market Analyst

It’s a week laden with event risk. We know that. We understand riskier asset classes have run very hard. We know there’s plenty of cuts priced into developed market yield curves, despite the reluctance from central bankers to confirm. We know the risks yet we’re still buying risk.

You’d think if there was any real caution heading into US CPI, long bond auctions and rate decisions from the Fed, ECB and BoE, it would have surfaced by now. But it hasn’t. It’s the type of mindset that suggests only an uncomfortably hot inflation print may be enough to upset the applecart, and even that may not be enough.

With earnings risk not an immediate threat, you get the sense that unless the disinflationary trend is truly questioned, markets will be able to brush aside feeble attempts to push back against large scale easing expectations, as we saw two Friday’s back when Jerome Powell’s warning that rates could rise again was almost instantly dismissed.

Markets know that unless the Fed and other central banks are truly intending to hike again, they can control the narrative. The Fed gave them that power by acknowledging the role tighter financial conditions played in assisting the inflation fight. With the consensus view being the battle has been won, markets believe the economy needs looser financial conditions, and fast.

Unless inflation show signs of heating up, the soft landing narrative may see risk run riot, aided by a softer US dollar and bond yields. The total lack of fear gives the impression markets, collectively, have made up their mind as to what they intend to do. And unless the data or central banks make a compelling case to the contrary, the path of least resistance remains higher.

-- Written by David Scutt

Follow David on Twitter @scutty


How to trade with City Index

You can trade with City Index by following these four easy steps:

  1. Open an account, or log in if you’re already a customer 

    Open an account in the UK
    Open an account in Australia
    Open an account in Singapore

  2. Search for the market you want to trade in our award-winning platform 
  3. Choose your position and size, and your stop and limit levels 
  4. Place the trade
Related tags: Equities Fed FX Commodities

Open an account today

Experience award-winning platforms with fast and secure execution.

Web Trader platform

Our sophisticated web-based platform is packed with features.
Economic Calendar