Investors are pricing too few interest-rate increases despite growing inflationary pressures, Deutsche Bank AG strategist Henry Allen has warned.
In a Monday note, Allen pointed to a widening gap between market expectations for limited Fed and ECB tightening and evidence that prices are accelerating. The US ISM services index shows input costs rising at levels associated with the post-pandemic period, when US CPI inflation was running at about 5%.
Energy, food and metals prices have risen as the Middle East conflict persists, supply routes remain disrupted and extreme weather affects agricultural output.
Despite Fed Chair Kevin Warsh’s warning last month that inflation was not meaningfully slowing, markets price only two Fed hikes by the end of July 2027. ECB markets price roughly three quarter-point hikes by July.
Allen said investors have underestimated central banks’ willingness to hike rates aggressively in four of the past five years. He warned that if rate pressures persist, resilient equity and credit markets could be forced to adjust.
