As global yields and commodity prices continue to rise around the world, and as various countries continue to implement monetary and fiscal stimulus programs, the end result has led to the fuelling of inflationary concerns, and market jitters, among investors. Though we do think that these concerns are a little overblown, a near-term increase in inflation could still prompt volatility in global markets. In the months ahead, though we do believe investors will need to “batten down the hatches” in the face of market volatility, our call for the cyclical recovery this year still continues to stand.
Market expectations for US inflation over the next two years has reached their highest level since May 2018, with the US 10-year breakeven inflation rate rising to 2.18% as of February 2021. Though this is an indication that inflation is around the corner, we don’t see persistently higher price pressures in the near term. This is due to the fact that there is still considerable slack in the (global) economy, as we don’t expect global GDP growth to regain its trend until the end of this year.
Nevertheless, a near-term bump in inflation is most certain given the current macro environment. At some point, over the next few months, investors will face a combination of rising inflation, as well as strong economic momentum, while central banks continue to add liquidity and keep interest rates close to zero. Given this high level of macro uncertainty, periodic spikes in volatility should be expected. For investors still willing to ride out the spikes, we believe these are a few things that should be should kept in mind: