Deutsche Bank macro strategist Henry Allen is sounding the alarm on what he sees as a potentially unsustainable balancing act across financial markets. In an appearance on Bloomberg’s “Bloomberg Brief” and a recent research note, Allen laid out a case that equity, credit, and rates markets are collectively telling a story that may not hold together once reality arrives in the form of fresh inflation data and the Jackson Hole Economic Policy Symposium.
The core tension: markets are simultaneously pricing in robust economic growth and limited additional tightening from the Federal Reserve, even as core PCE inflation remains stubbornly above the Fed’s 2% target.
The data that could break the spell
The July Personal Consumption Expenditures report, the Fed’s preferred inflation gauge, is expected around August 26. Consensus estimates point to a 0.2% month-over-month increase in core PCE, which would translate to 3.3% on a year-over-year basis. Headline PCE is forecast at 0.1% month-over-month, or 3.6% annually.
Just a day or two after the PCE release, Fed Chair Kevin Warsh is scheduled to speak at the Jackson Hole Economic Policy Symposium on August 27-28. Jackson Hole has historically served as the venue where Fed chairs telegraph significant policy shifts. In 2022, Jerome Powell used the same stage to deliver a blunt warning about the pain of fighting inflation, a speech that sent markets tumbling.
