Strategy blog: Are we nearly there yet?


It was way too soon to say, as many have been, that the inflation surge is permanent – after just a year.

But it is also too late now, despite the market response to the soft October US CPI, to say it is transitory.

Teams transitory and permanent have both overstated their cases. We are unashamedly in the middle of the road: as we see it, today's inflation is a bit of both. We do expect Western inflation to slow markedly, and soon; but we do not expect it to return sustainably to target for a long time.

Of course, when you stand in the middle of the road you risk being run over from both directions. And it leads to more nuanced investment advice.

If inflation really were going to be (say) 10% forever, the advice would be clear: we should sell bonds and stocks across the board. Ditto, if it were going straight back to the targeted 2% without passing "Go": we should buy bonds and stocks.

But if it's going to subside gradually, at different rates, perhaps not in a straight line, and not get back to where it started, then some assets and regions will look attractive before others, and things may feel, even for long-term investors, uncomfortably tactical for some time.

Our response to the data has been to finally close completely a long-standing aversion to US government bonds – we would switch some cash into them. It is still too soon to say definitively that inflation and interest rate risk have peaked – there was a "false summit" in the spring remember – but with bond yields having risen a long way, and much of the US yield curve now offering a good chance of matching or beating what we think might be the likely inflation trend, we think the risks facing US bonds are more balanced now than for many years.

We think it is too soon to say the same in Europe. Yields are lower, inflation is currently higher, currencies have been weaker (though that can change) and the monetary policy cycle is less advanced: we would still prefer cash to bunds and most gilts.

After much deliberation, and knowing that markets often "look across the valley", we also think it is still too soon to advocate owning more equities than usual. The local stock market response to the US CPI was remarkable, but likely flattered by an earlier sell-off reportedly triggered by volatility in cryptocurrencies (yes, me too!). As noted, the data itself was not that decisive; central banks – including the Fed, for a while at least – will continue to raise policy rates; and corporate earnings risk remains elevated (as, of course, does geopolitical risk).

Ready to begin your journey with us?

Past performance is not a guide to future performance and nothing in this blog constitutes advice. Although the information and data herein are obtained from sources believed to be reliable, no representation or warranty, expressed or implied, is or will be made and, save in the case of fraud, no responsibility or liability is or will be accepted by Rothschild & Co Wealth Management UK Limited as to or in relation to the fairness, accuracy or completeness of this document or the information forming the basis of this document or for any reliance placed on this document by any person whatsoever. In particular, no representation or warranty is given as to the achievement or reasonableness of any future projections, targets, estimates or forecasts contained in this document. Furthermore, all opinions and data used in this document are subject to change without prior notice.

Read more articles

  • Strategy blog: The return of bank risk?


    As focus shifts from the collapse of Silicon Valley Bank last week to the solvency Credit Suisse, central bank interventions have soothed fears of the contagion spreading. In this strategy blog our team analyses why our overall risk appetite remains unchanged.

  • Strategy blog: Banking stress containable


    Idiosyncratic headwinds compounded by losses on its treasury and mortgage-backed security portfolio lead to the collapse of Silicon Valley Bank. Are there signs of contagion? In this Strategy blog, we analyse the situation around the collapse and consider further risks.

  • Asset Management Europe: Monthly Macro Insights - March 2023

    Market Commentary

    Despite cautious central bank communication about the policy outlook, particularly in view of the persistent strength of labour markets, investors were expecting rate cuts in the second half of 2023 amid a fall in global inflation. Yet, recent macroeconomic data has poured cold water on their quick disinflation sanguine view.

  • Perspectives: A Female Legacy

    Market Perspective

    This International Women's Day we open the door to the Rothschild Archive. In the latest episode Wealth Management Switzerland's Perspectives podcast, Laura Künlen and Melanie Aspey, Director of the Rothschild Archive, shed light on how the women of the Rothschild family shaped the early days of the business and how their legacy translates till today.

  • Strategy blog: The energy crisis - one year on


    Lower commodity prices, including energy prices, are trickling down to consumers, affecting both sides of the Atlantic slightly differently. In this strategy blog, we examine how the energy crisis has abated a year after the outbreak of war in Ukraine and its impact.

  • Monthly Market Summary: February 2023


    Capital markets experienced a difficult February, as renewed interest rate risk from further monetary tightening moved into focus. Both global equites and government bonds fell last month.

Back to top