Deutsche Bank warns: Accumulated inflation and interest rate risks are worsening and market misalignment may impact the stock market and credit assets

The Zhitong Finance App learned that the Deutsche Bank research department warned that the financial market is facing increasing disconnection — inflationary pressure continues to accumulate, yet the market expects that major central banks will only carry out limited policy tightening, which makes stocks and credit assets vulnerable to potential repricing.

In the newly released “Market Dislocations” (Dislocations) report, Deutsche Bank said that recent bond sell-offs have pushed global bond yields to multi-year high levels, but the market is still pricing a relatively mild environment where economic growth remains resilient, inflation is controlled, and the central bank only raised interest rates moderately. However, the bank believes that as energy, food, and other commodity prices continue to put upward pressure on inflation, this equilibrium will be difficult to maintain.

The inflationary environment has become particularly worrying. Deutsche Bank pointed out that the ongoing turbulence surrounding the Strait of Hormuz is a key source of risk. At the time of publication of the report, the price of Brent crude oil was around $96 per barrel, up from $82.49 a month earlier; at the same time, European gas futures prices had risen to their highest level since early 2023.

Food prices also rose sharply in August, with sugar, wheat, and corn prices all showing significant monthly increases. However, the futures market is still setting expectations that energy prices will fall in the coming year. Deutsche Bank said that if this expectation is not realized, it will cause “serious market misalignment.”

The Federal Reserve is another area where Deutsche Bank believes the market may underestimate the risk of policy tightening. The bank pointed out that in four of the past five years, investors have underestimated how hawkish the policy stance the Federal Reserve will adopt.

Meanwhile, the payment price segment in the ISM Services Index rose to its highest level in four years in August. Deutsche Bank said that judging from the historical situation, this level usually corresponds to the US consumer price index (CPI) inflation rate higher than 5%. The market initially anticipated that the Federal Reserve would cut interest rates twice before the September meeting of this year, but not a single rate cut was realized. Instead, the futures market thought that the probability of raising interest rates reached 60%.

Deutsche Bank said that the risk is that investors may once again be caught off guard by the more hawkish US Federal Reserve. The bank said that the ECB is also facing a similar disconnect. Despite stronger economic growth, higher inflation expectations, and rising energy prices, there has been little change in market pricing. Even if the price of natural gas futures rose more than 18% and the price of Brent crude oil rose again to about $96 per barrel, there was little change in the market's pricing for further interest rate hikes by the ECB until June 2027.

Deutsche Bank also focused on the crude oil futures curve. At the time, the 6-month Brent crude oil contract price was about $83 per barrel, while the recent contract price was 96.20 US dollars, reflecting the market's expectation that the Strait of Hormuz will eventually reopen. The bank warned that if this assumption fails repeatedly, investors may have to re-evaluate not only oil prices, but also stocks and credit assets that benefit from expectations of falling energy costs.

Regarding risk assets, Deutsche Bank said that up to now, despite higher real returns, stocks and credit assets have remained resilient, mainly due to stronger than expected global economic growth. However, the bank warned that inflationary shocks are increasingly showing negative supply shocks, which may simultaneously drive up prices and weaken economic growth.

For risky assets, this will create a particularly difficult environment, as policymakers have fewer and fewer tools to cushion the economic downturn: inflation is still above target, limiting room for monetary policy easing; at the same time, high bond yields and higher debt levels limit the ability to stimulate fiscal policy.

Therefore, Deutsche Bank believes that the market is in a “very narrow landing range”. The biggest risk is that continued inflation forces central banks to adopt more aggressive austerity policies, and at the same time, rising yields are beginning to put pressure on economic growth.