central banks are becoming more vocal as inflation rises

Cross-Asset Weekly 01 October 2021

1 | Cross-Asset Weekly

Central banks are becoming more vocal as inflation rises

With the current rise in inflation apparently less transitory than expected, central banks

are pivoting to a slightly less dovish stance. The Fed had shown more rate hikes in its dot

plot for 2024 last week, while the Bank of England, worried about inflation expectations

becoming unanchored, has fired up speculation about a timelier policy rate lift -off. This

has spilled over into euro area rates markets, where expectations for short-term rates

have started to rise as well.

Higher rate expectations are pushing up long-term bond yields, at a time when economic

growth rates are generally slowing from the post-pandemic peak. Still, fears of stagflation

in the US look overdone. There is a good chance that the post-pandemic world will see

higher productivity growth, which should help keep a lid on inflation even in the face of

higher wages.

Fixed income markets, such as euro area government bonds, find themselves in a difficult

spot, at least for now, with unattractive returns in an environment of rising rates, while

commodity-linked currencies are set to benefit from strong commodity prices and a more

hawkish rate outlook. Equity markets, on the other side, are entering more difficult terri-

tory as earnings revisions are coming down and real rates (in the US) have risen, both of

which have been important drivers for the strong equity market performance so far.

Finally, we note that the German election outcome is indicative of a continuation of cen-

trist policies and political stability.

This week’s highlights

US Macro 2

This is not stagflation

Euro area fixed income 4

ECB rate expectations are on the rise

Commodity currencies 6

Caught in between supply shortages, rates and risk-off

German federal election 8

Likely continuation of centrist policies

Global equities 9

The Fed dials up the heat, the pressure on equities is rising

Economic Calendar 11

Week of 04/10 – 08/10/2021

Market Performance 12

Global Markets in Local Currencies

Contacts

Dr. Karsten Junius, CFA

Chief Economist

[email protected]

+41 58 317 32 79

Raphael Olszyna-Marzys

International Economist

[email protected]

+41 58 317 32 69

Wolf von Rotberg

Equity Strategist

[email protected]

+41 58 317 30 20

Alex Rohner

Fixed Income Strategist

[email protected]

+41 58 317 32 24

Dr. Claudio Wewel

FX Strategist

[email protected]

+41 58 317 32 26



US Macro

This is not stagflation

The macro backdrop has clearly become more challenging for investors. Growth is slow-

ing, central banks are turning more hawkish and the Fed will probably have to pay

closer attention to the inflation part of its dual mandate. Still, fears of stagflation look

overdone. There is a good chance that the post-pandemic world will see higher produc-

tivity growth, which will help keep a lid on inflation even in the face of higher wages.

Central bankers continue to view higher inflation as largely transitory. At the ECB’s forum

on central banking earlier this week, Jay Powell argued that the “current inflation spike is

really a consequence of supply constraints meeting very strong demand, and that is all

associated with the reopening of the economy – which is a process that will have a begin-

ning, a middle and an end”. To a large extent, this is true. But the mistake that they make,

in our view, is to believe that these imbalances will revert quickly.

Inflation is likely to drop more gradually than the Fed forecasts, in large part because the

pandemic has led to structural changes. Consumption patterns will probably not go back

to what they used to be and the mismatch in labour markets will persist for some time as

economies reallocate resources. The pandemic also seems to have led to a shift in work-

life preferences, particularly for older workers, reducing labour supply.

Let’s take these in turn. During the last 18 months, the composition of demand and eco-

nomic activity – towards goods and away from services – has been a powerful driver of

inflation (Exhibit 1). Downward price stickiness implies that strong demand for goods has

increased prices by more than weak demand for services has eroded them. In addition,

the sudden increase in demand for tradeable goods, combined with crisis-induced supply-

chain disruptions, has led to a huge lengthening in suppliers’ delivery times, pushing pro-

ducer costs higher (Exhibit 2).

The marked shift in the composition of spending has increased the demand for workers in

some sectors, while reducing demand in other sectors. Since labour is not perfectly fungi-

ble across sectors, this has probably caused the structural rate of unemployment to rise.

This means a higher unemployment rate for every job openings rate (an outward shift in

the Beveridge curve) and more wage pressure at every level of joblessness (Exhibits 3 -4).

Raphael Olszyna-Marzys

International Economist

[email protected]

+41 58 317 32 69

Imbalances in the economy are unlikely to re-

vert quickly, keeping inflation elevated for

longer

The pandemic has probably led to structural

changes

The shift in the composition of demand has

had an important direct impact on inflation

Exhibit 1: The pandemic has forced a change in consumption patterns Exhibit 2: Supply chain disruptions are pushing producer prices higher

Source: Macrobond, Bank J. Safra Sarasin, 30.09.2021 Source: Macrobond, Bank J. Safra Sarasin, 30.09.2021

It has also led to an increase in labour market

mismatch and probably higher structural un-

employment



Looking ahead, demand for goods should wane, and demand for services should rise. The

source of inflation in 2021 should become a source of disinflation later. But the pandemic

has probably led to persistent changes to the way people consume and work, and labour

market mismatches will probably persist for some time. For example, online shopping has

remained elevated, even if shops have reopened. A recent Ipsos poll shows that employ-

ees would on average like to work half of the week at home once the pandemic is over.

Economies will probably require fewer waiters, but more delivery drivers and IT specialists.

Finally, the pandemic has probably induced a shift in work-life preferences, reducing la-

bour supply. There are about 2 million extra US retirees compared to what there would

have been if the retirement share had risen at its 2010-20 pace. Reassuringly, a recent

paper by the Kansas Fed shows that most of the increase in retirees has been driven by a

decline in the number of retirees re-joining the labour force, which could reflect pandemic-

related health concerns. Some of them will probably come back as the pandemic recedes.

In conclusion, while the macro backdrop has become more challenging for markets, we

think the stagflation story is overdone. True, growth is weakening, but from elevated lev-

els. And while the available pool of workers is likely to be lower in the post-pandemic world

than it would have been otherwise, pushing wages and inflation higher, there is a good

chance that the pandemic will also lead to higher trend productivity growth (Exhibit 6 and

read here); a wage-price spiral ‘à la 1970s’ is highly unlikely. Finally, the bar for central

banks to raise rates is quite high, and despite all of the talk about the Fed’s hawkishness,

the real policy rate is still predicted to be negative in 2024.

Exhibit 3: Sectors gaining and losing labour since the start of the crisis Exhibit 4: Beveridge curve points to higher structural unemployment


Demand patterns should normalise to some

extent, but are unlikely to fully revert

‘Excess’ US retirees account for about a quar-

ter of the employment shortfall. Some, but

not all of them, will re-join the labour force as

health concerns recede

Exhibit 5: Pandemic has led to a pick-up in US retirees Exhibit 6: The pandemic might also lead to higher productivity growth


The macro backdrop has become more chal-

lenging but fears of stagflation look overdone

-1000 -500 0 500

Couriers & Warehousing

Professional & Technical Services

Retail Gen. Merch and online

Construction (Residential Building)

Arts, Entertainment, & Recreation

Retail ex. Gen. Merch and Online

Administrative & Waste Services

Health Care & Social Assistance

Food Services & Drinking Places

Thousands

Change in US payrolls since 01/2020 ('000)

0

2

4

6

8

2 4 6 8 10 12 14 16

Pre-pandemic (01.2001-01.2020)

Post-pandemic (02.2020-latest)

US unemployment rate (%)

US job openings rate (%)

15

16

17

18

19

20

36

38

40

42

44

46

48

50

52

2010 2012 2014 2016 2018 2020

Population who is retired, mn, LHS Retirement share (%), rhs

https://www.kansascityfed.org/research/economic-bulletin/what-has-driven-the-recent-increase-in-retirements/

https://publications.jsafrasarasin.com/publ-dl-ch/dl-discl?dl=889FDE88BFAEEE232F6D73719388CAEA5C67F9FD5777763274AE42BC9C6A11A244CAAECD87F2068029F1A83784D28208



Euro area fixed income

ECB rate expectations are on the rise

The current global inflation spike and the realisation that all central banks are getting

closer to removing monetary accommodation have also spooked euro area rate mar-

kets. Expectations for policy rates are on the rise with a concomitant increase in bond

yields. Overall, we expect euro area yields to move up over coming quarters, however,

at a more moderate speed than in the past few weeks. Still, the expected rise in yields

(from low starting levels) does not get us very excited about euro area fixed income.

September was characterised by a rebound in developed markets’ government bond yields

after a substantial drop during summer. A more hawkish dot plot at the last Fed meeting as

well as a more vocal Bank of England, worried about inflation expectations becoming unan-

chored, have led to a general increase in policy rate expectations across developed markets.

Although different central banks operate on different timelines, the realisation that they are all

getting closer to removing monetary accommodation (and raising interest rates at some stage)

has also spooked euro area markets. ECB policy rate expectations have increased to roughly

1.5 rate hikes until September 2024, which is close to what we are forecasting.

Bund yields have risen accordingly, which has led to a re-steepening of the 2y/10y segment of

the yield curve. We commented on the likelihood of such a move (see our Cross asset weekly

“ECB – calibrating, but not yet tapering asset purchases, 27 August 2021”). The relative flat-

ness of the euro area yield curve and the fact that the potential lift-off date for ECB policy rates

is quite far ahead leaves the 2y yield mostly unaffected, hence higher rate expectations filter

directly through to 10y Bund yields and thus a steeper 2y/10y yield curve (Exhibit 2).

The current spike in global inflation rates and the uncertainty with regard to how transitory they

will be are also affecting euro area long-term market based inflation expectations. While we do

not yet observe meaningful wage pressures in the euro area, markets are pricing higher long-

term inflation expectations with German 10-year break evens reaching the highest level since

2013. Notably, nominal 10-year Bund yields have shown little movement overall, hence higher

inflation expectations have come with a concomitant fall in 10-year real rates as measured by

yields on German inflation-linked bonds. In fact, ever since the onset of the COVID-pandemic,

inflation expectations and real yields have been an almost perfect mirror image (Exhibit 3). As

a consequence, real yields have fallen substantially below the level implied by policy rates

Alex Rohner

Fixed Income Strategist

[email protected]

+41 58 317 3224

Euro area rate expectations are on the rise

Exhibit 1: ECB rate expectations have started to rise again since the

beginning of September

Exhibit 2: Almost a linear relationship between forward rate expecta-

tions and 10-year Bund yields

Source: Bloomberg, Bank J. Safra Sarasin, 30.09.2021 Source: Bloomberg, Bank J. Safra Sarasin, 30.09.2021

Upward pressure on Bund yields and a

steeper curve

Inflation expectations and real yields are

diverging

-1.00

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

Jan-19 Jul-19 Jan-20 Aug-20 Feb-21 Sep-21

ECB policy rate in 5y ECB policy rate in 3y ECB policy rate in 1y-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0.0

0 5 10 15 20 25 30 35

10y Bund yield

cumulative implied tightening over 2y starting

in 1y in bp (daily data since 1.1.2021)

https://publications.jsafrasarasin.com/publ-dl-ch/dl-discl?dl=564F1B2ECBBB2E78BD678E188AB989FD8B5985961DDE10C9BD1B8ADDA507577CCE356CD3276041CDB0A34B8A02FFDFCE



Exhibit 4). Based on euro area fundamentals, market-based inflation expectations have

probably risen too fast, in particular the rapid increase in September is not explained by

economic dynamics, commodity prices and the evolution of the EUR (Exhibit 5). Neverthe-

less, elevated inflation prints over coming months should keep inflation expectations and

curve steepening pressures elevated, while real yields should stay extraordinarily low until

the ECB changes its guidance on policy rates, which is unlikely to happen anytime soon.

A significant driver for euro area bond yields (and peripheral spreads) will be the handling

of the Pandemic Emergency Purchase Program (PEPP) due to be terminated at the end of

March 2022. Roughly 75bn EUR of public sector bond purchases per month will need to

be (at least partially) replaced next year. We believe that it is highly likely that the ECB will

implement a flexible solution to keep euro area financing conditions at an appropriate

level in order to reach its objectives.

While euro area policy rate expectations have shifted more in line with our forecasts, the

current re-pricing of global short-rate expectations is likely not over yet, still implying some

upside for euro area bond yields. Overall, we expect euro area interest rates to move up

over coming quarters, however, at a more moderate speed than in the past few weeks.

Still, the expected rise in rates and low starting yields leave euro area fixed income unat-

tractive, at least for now.

Exhibit 3: Inflation expectations and real yields are a perfect mirror im-

age since the onset of the COVID-pandemic

Exhibit 4: Real yields are now substantially below levels indicated by

policy rate expectations


The ECB will likely implement an adequate

and flexible replacement solution for PEPP

Exhibit 5: Inflation expectations have likely overshot in the short term Exhibit 6: Roughly EUR 75bn/month worth of public sector asset pur-

chases will run out in March 2022


Euro area bonds remain unattractive for now

-2.0

-1.0

0.0

1.0

2.0

2015 2016 2017 2018 2019 2020 2021

German 10y real yield German 10y inflation expectations

German 10y yield

-1.0

0.0

1.0

2.0

-2.0

-1.0

0.0

1.0

2012 2015 2018 2021

German 10y real yield Implied ECB policy rate in 3y, rhs

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

-0.5

-0.3

-0.1

0.1

0.3

0.5

2013 2015 2017 2019 2021

5y/5y EA inflation swap, (3m change, bp)

Fitted Line (3m change in EA Mfg PMI, Comm Prices, EURUSD, r.h.s.)

0

20

40

60

80

100

04-2020 09-2020 02-2021 07-2021

Germany Spain France Italy Netherlands Supranationals

bn EUR



Commodity currencies

Caught in between supply shortages, rates and risk-off

We maintain our positive stance on commodity-linked currencies, while acknowledging

their high sensitivity to equities. We like the Norwegian krone (NOK) and the Canadian

dollar (CAD), which particularly benefit from high oil prices and whose valuation gaps

versus the US dollar (USD) have widened further. Among the Antipodeans, a historical

divergence of policy rate expectations favours the Australian dollar (AUD) versus the

New Zealand dollar (NZD).

Throughout most of the COVID-19 pandemic, commodity-linked G10 currencies such as

the Australian, the Canadian and the New Zealand dollar along with the Norwegian krone

have shown a stellar performance, which culminated in the first quarter of this year (Ex-

hibit 1). The Fed’s unexpectedly hawkish June meeting, however, sent commodity-linked

currencies lower. They have not yet fully recovered such that their year-to-date perfor-

mance versus the US dollar remains negative.

The absence of a clear trend throughout the past months begs the question where com-

modity-linked currencies are headed. Going forward, we think that they should be predom-

inantly driven by two factors. First, commodity prices should continue to act as an im-

portant driver. In our view, current supply shortages are likely to continue as supplier de-

livery times have not dropped significantly so far (see “This is not stagflation”, Exhibit 2

on page 2). Regarding the oil price, we do not expect to see a pronounced drop in the near

term, despite Brent having reached a three-year high. With Hurricanes Ida and Nicholas

impairing the functioning of production facilities in the Gulf of Mexico, global supply has

taken a persistent hit. Furthermore, the strong surge in gas prices has shifted additional

demand towards oil, which should persist for a while given the magnitude of current de-

mand-supply imbalances. And lastly, the increase in seasonal demand is unlikely to re-

move upward pressure. Within the commodity-linked G10 FX space, both CAD and NOK

should primarily benefit from these tailwinds, given that their oil price beta is particularly

high and their valuation gaps versus the US dollar have widened as of late (Exhibit 2).

Beyond oil, we expect shortages to continue alternating between various other commodi-

ties, such that their prices should also remain elevated over the coming months.

Dr. Claudio Wewel

FX Strategist

[email protected]

+41 58 317 32 26

The Fed’s unexpectedly hawkish June meet-

ing sent commodity currencies lower, from

which they have not yet fully recovered

Exhibit 1: Commodity currencies gained strongly earlier this year Exhibit 2: The USD-CAD valuation gap has widened further


Impaired production facilities, the increase of

seasonal demand, along with surging gas

prices make a pronounced near-term drop in

the oil price rather unlikely, which lends par-

ticular support to the CAD and the NOK

-0.3

-0.2

-0.1

0.0

0.1

1.15

1.25

1.35

1.45

1.55

2018 2019 2020 2021

Yield diff Oil price USD-CAD USD-CAD model

yield diff / oil price impactsUSD-CAD



Second, most of the commodity-exporting economies have seen a strong recovery with

substantial progress on the inflation and employment front, which brings them closer to a

policy rate lift-off. Last week, Norges Bank was the first to embark on the hiking cycle,

lifting its policy rate from 0 to 25bp. Remarkably, the CAD, NOK and NZD policy rate ex-

pectations have remained higher than Fed rate expectations, despite its latest hawkish

twist (Exhibit 3). To be specific, markets expect the Norges Bank (NB) and the Reserve

Bank of New Zealand (RBNZ) to hike their policy rates well beyond 100bp and the Bank of

Canada (BoC) to lift its policy rate to around 100bp within the coming year, while markets

expect the Fed to hike only once. This should continue to lend support to the CAD, the NZD

and the NOK over the coming months. Conversely, markets have priced a less hawkish

policy rate path by the Reserve Bank of Australia (RBA). Yet the divergence between the

RBA’s and the RBNZ’s implied policy rates looks a bit overdone by historical standards

(Exhibit 4). Hence we would expect the gap to narrow somewhat going forward, which

would give the AUD a relative edge against the NZD.

Finally, we note that commodity-linked currencies tend to behave similar to other risk as-

sets, which becomes visible in their high correlations with equity markets. Interestingly,

this link has become more accentuated as of late (Exhibit 5). Hence, we acknowledge the

risk that commodity-linked currencies could react to sharper moves in risk assets with

tapering coming closer. But even in this case, commodity prices and yields should provide

a floor and hence we maintain our generally positive stance on commodity currencies.

Exhibit 5: Commodity-linked currencies have become more sensitive towards equities

Source: Macrobond, Bank J. Safra Sarasin, 30.09.2021

-0.5

-0.3

-0.1

0.1

0.3

0.5

0.7

NOK AUD NZD CAD SEK GBP CHF EUR JPY USD

Distribution within past 2 years (q=10%, median, q=90%) Last 90d 90d prior

Sensitivity of NEER vs S&P 500, based on 2d log returns

RBNZ, NB and BoC rate expectations are par-

ticularly hawkish, but we expect the gap be-

tween RBNZ and RBA to narrow

Exhibit 3: RBNZ, NB and BoC implied rate paths are most hawkish Exhibit 4: Large divergence between RBA and RBNZ rate expectations


Commodity currencies have become more

vulnerable to sharp moves in risk assets

-100

-50

0

50

100

150

200

250

NZD NOK CAD USD AUD GBP SEK JPY EUR CHF

1y

3y

3y, 60d ago

3y USD

OIS, implied policy rates over the next x years, in bp

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2016 2017 2018 2019 2020 2021

RBA RBNZ

Implied policy rate in 1 year



German federal election

Likely continuation of centrist policies

In Germany’s federal election, the social-democrats have re-emerged as the strongest

party after 19 years. With the Left party in any coalitional setup off the table, Germany

is probably headed towards a “Traffic light” or a “Jamaica” coalition. Given that the next

German government likely consists of three coalition partners, the need to agree on

common positions should lead to a continuation of centrist policies.

By a thinner margin than some polls suggested, the Social-democrats (SPD) have re-

emerged as the strongest party from Sunday’s federal election after 19 years: The official

preliminary result puts the party 10 seats ahead of the Christian Democrats (CDU/CSU)

with 206 out of a total of 735 seats (Exhibit 1).

Along with the CDU/CSU, voters’ support has dropped sharply for the Left party, pushing

the latter even below the 5% hurdle (Exhibit 2). While the party will remain in the parlia-

ment on the back of three directly won mandates, its meagre election result implies that

the Left party will not participate in any federal government, virtually eroding the possibility

of a major leftish shift in German politics. Given the CDU/CSU’s substantial loss of voter

support, Germany’s 20th Bundestag will primarily feature mid-sized parties. This implies

that both the Greens and the Liberals will be equally needed to form the next government

(Exhibit 3). Yet it must be acknowledged that both parties’ political agendas di ffer quite

substantially, particularly with respect to their envisaged tax and climate policies . On

Wednesday, Greens and Liberals have started to engage in exploratory talks, which repre-

sents a first, given that historically, the strongest party has initiated such talks.

While “Jamaica” and the least popular “Grand Coalition” remain a possibility, a “Traffic

light” coalition is now the most likely outcome, given that the SPD emerged as the strong-

est party from the election, which has widely been acknowledged as a clear mandate to

head the next government. In either case, the need to agree on common positions should

lead to a continuation of centrist policies and hence guarantee stability. With the negoti-

ations on the political agenda unlikely to conclude much earlier than year-end, the for-

mation of the next German federal government could take a while and hence we would not

expect to see any decisive market moves before negotiations are advancing towards the

draft of a coalition agreement.

Dr. Claudio Wewel

FX Strategist

[email protected]

+41 58 317 32 26

Social-democrats emerged as the strongest

party after 19 years

The participation of the Left party in the fed-

eral government, a potential market scare, is

off the table

Negotiations on the political agenda unlikely

to conclude much earlier than year-end

Exhibit 1: SPD emerged as strongest party Exhibit 2: SPD and Greens gained support Exhibit 3: “Traffic light” coalition most likely

Source: DW, Bank J. Safra Sarasin, 30.09.2021 Source: DW, Bank J. Safra Sarasin, 30.09.2021 Source: DW, Bank J. Safra Sarasin, 30.09.2021

CDU/CSU;

196

The Greens;

118SPD; 206

Liberals;

92

The Left; 39

AfD; 83

Seats in the 20th German Bundestag, total = 735

6.8% 6.6%

1.3%

-2.0%

-5.9%

-8.3%-10%

-5%

0%

5%

10%

The

Greens

SPD Liberals AfD Left CDU/

CSU

«Winners and losers» − changes to the composition of

the 20th German Bundestag (according to preliminary

«Traffic light»

«Jamaica»

«Grand Coalition»

0 10 20 30 40 50 60

SPD CDU/CSUThe Greens LiberalsAbsolute majority

Possible coalitions in the 20th German Bundestag

% of seats

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Global equities

The Fed dials up the heat, the pressure on equities is rising

Last week’s Fed meeting has led to a spike in US yields, led by the real rate component.

Equity markets responded with a rotation into value stocks, abandoning the expensive

long-duration end of the market. As a result, index levels retreated as valuations suf-

fered from a rise in the discount rate. We think equity market risk entering a difficult

territory, as earnings revisions appear to be coming down quickly. The Fed needs to

tread cautiously in order to not cause meaningful setbacks. A sustained outperfor-

mance of value would be unusual against such a backdrop, with the balance of risks

for equities have further shifted to the downside.

The recent adjustment of the Fed’s policy stance has triggered a spike in US Treasury

yields, led by real rates and a tick higher in Fed Funds futures. Equity markets reacted

promptly, seeing rates-sensitive sectors move strongly. Value outperformed growth by

more than 3% over the past week, as rising rates supported financials on the one hand,

while they weighed on long-duration sectors, such as tech or communication services, on

the other. Given the dominance of these tech-heavy sectors in the US market, index levels

dropped, with the S&P 500 12-month forward price-to-earnings ratio (PE) derating by

around 3% and hitting the lowest level since the beginning of the year (Exhibit 1).

The Fed needs to tread a fine line in order to not cause larger dislocations in equity mar-

kets as it is confronted with an increasingly fragile environment. Typically, one would ex-

pect the Fed to guide market expectations for Fed Funds rates higher during the early

stages of the cycle, when data is improving and earnings upgrades accelerate. This is re-

flected by the strong positive correlation between macro momentum and Fed Funds fu-

tures (Exhibit 2). Leaning against the cycle, by pushing rates higher during the decelera-

tion phase, puts undue pressure on risk assets and can quickly trigger sharper downturns.

Two examples of the recent past are 2013 and late 2018, when the Fed scared the market

with its talk about tapering (2013) or continued to hike as the cycle had begun to slow

(2018) (Exhibit 2). In both cases, equities came under pressure and sold off.

Another observation reinforcing these worries is earnings. After seeing continuous up-

grades since the beginning of the year, net upgrades for US consensus earnings have re-

treated over recent weeks. One-month net earnings revisions are back down at levels

where they last were in March. While they are sti ll positive, we have likely seen the peak

Wolf von Rotberg

Equity Strategist

[email protected]

+41 58 317 30 20

The spike in US yields after the Fed has led to

a value rotation and brought valuations down

Tighter policy against the backdrop of a sof-

tening macro cycle puts the equity market on

the spot

Exhibit 1: The rise in real rates weighs on valuations Exhibit 2: The Fed needs to be cautious guiding expectations higher

Source: Refinitiv, Bank J. Safra Sarasin, 29.09.2021 Source: Refinitiv, Bank J. Safra Sarasin, 29.09.2021

Earnings revisions have retreated signifi-

cantly over recent weeks

-1.4

-1.0

-0.6

-0.2

0.2

0.6

1.0

1.413

14

15

16

17

18

19

20

21

22

23

2015 2016 2017 2018 2019 2020 2021

S&P500 12m fwd PE US TIPS yield, %, inverted (rhs)

-12

-8

-4

0

4

8

12

16

-250

-200

-150

-100

-50

0

50

100

150

200

250

2011 2012 2014 2016 2018 2019 2021

US Fed funds futures, next 5 years, 6m chg ISM mfg, 6m chg (rhs)

bps Previous periods of

market stress



of the revision cycle, with substantially less earnings support going forward. As a result,

both legs the equity market stands on, have softened significantly. Valuations are under

pressure from rising rates while earnings are feeling the softening macro cycle. The end

of the Goldilocks environment, marked by rising macro data and higher inflation expecta-

tions, while real rates are falling, appears to be closer (Exhibit 4).

Another note of caution should be sounded with regards to the performance of value. Past

experience not only shows that rising rates against the backdrop of weakening macro data

are generally bad for equities, but also that value typically requires the combination of

both, higher rates and positive macro momentum, to outperform (Exhibits 5, 6). In an en-

vironment in which rates rise for other reasons than being supported by an accelerating

macro cycle, a rally in value stocks tends to be rather short-lived and should not be

chased, in our view.

Exhibit 3: Net earnings upgrades have dropped over the past month Exhibit 4: Lower rates and higher inflation were goldilocks for equities


The bounce in value should be short-lived if

the cycle continues to weaken

Exhibit 5: Value performance usually needs both, rates and … Exhibit 6: …macro data to move higher


40

45

50

55

60

65

-80%

-60%

-40%

-20%

0%

20%

40%

60%

2011 2013 2015 2017 2019 2021MSCI USA 1-month net earnings revisions US ISM mfg (rhs)

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2009 2011 2013 2015 2017 2019 2021

US inflation expectations 10Y US real yield

%

-125

-100

-75

-50

-25

0

25

50

75

100

-16

-12

-8

-4

0

4

8

12

2016 2017 2018 2019 2020 2021

AC World, value vs growth, 3-month chg US 10-year yield, 3-month chg, rhs

% bps

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

-16

-12

-8

-4

0

4

8

12

2016 2017 2018 2019 2020 2021AC World, value vs growth, 3-month chgUS ISM manufacturing, 3m chg (rhs)

% bps



Economic Calendar

Week of 04/10 – 08/10/2021

Country Time Item Date Unit

Consensus

Forecast Prev.

Monday, 04.10.2021

EU 10:30 Sentix Investor Confidence Oct Index -- 19.6

US 16:00 Durable Goods Orders Ex Trans. Aug mom -- 0.2%

16:00 Cap Goods Orders Nondef Ex Air Aug mom -- 0.5%

Tuesday, 05.10.2021

JP 02:30 Jibun Bank Japan PMI Services Sep F Index -- 47.40

IT 09:45 Markit Italy PMI Services Sep Index -- 58.00

US 16:00 ISM Services Index Sep Index 60.00 61.70

Wednesday, 06.10.2021

US 13:00 Mortgage Applications Oct1 % -- -1.10%

14:15 ADP Employment Change Sep 1'000 450k 374k

Thursday, 07.10.2021

JN 01:50 Leading Index CI Aug P Index -- 104.10

GE 08:00 Industrial Prod. MoM Aug P mom 0.50% 1.00%

08:00 Industrial Prod. YoY Aug P yoy 5.90% 5.70%

US 14:30 Initial Jobless Claims Sep25 1'000 -- 362k

Friday, 08.10.2021

US 14:30 Change in Nonfarm Payrolls Sep 1'000 500k 235k

14:30 Change in Manufact. Payrolls Sep 1'000 30k 37k

14:30 Unemployment Rate Sep % 5.00% 5.20%

Source: Bloomberg, J. Safra Sarasin as of 30.09.2021



Market Performance

Global Markets in Local Currencies

Government Bonds Current value Δ 1W Δ YTD TR YTD in %

Swiss Eidgenosse 10 year (%) -0.19 -3 36 -2.2

German Bund 10 year (%) -0.22 1 35 -2.5

UK Gilt 10 year (%) 1.01 8 79 -5.2

US Treasury 10 year (%) 1.49 4 57 -3.5

French OAT - Bund, spread (bp) 36 2 13

Italian BTP - Bund, spread (bp) 106 5 -5

Stock Markets Level P/E ratio 1W TR in % TR YTD in %

SMI - Switzerland 11’462 17.9 -2.5 11.9

DAX - Germany 15’007 14.8 -2.5 11.2

MSCI Italy 806 12.6 -1.4 13.0

IBEX - Spain 8’667 15.4 -0.9 10.9

DJ Euro Stoxx 50 - Eurozone 3’985 16.0 -3.4 16.5

MSCI UK 1’990 12.3 0.5 13.7

S&P 500 - USA 4’308 21.3 -3.2 15.9

Nasdaq 100 - USA 14’690 27.8 -4.1 14.6

MSCI Emerging Markets 1’253 13.2 -1.5 -1.2

Forex - Crossrates Level 3M implied

volatility

1W in % YTD in %

USD-CHF 0.93 6.2 0.7 5.7

EUR-CHF 1.08 4.1 -0.4 -0.5

GBP-CHF 1.25 7.3 -1.0 4.3

EUR-USD 1.16 5.2 -1.2 -5.8

GBP-USD 1.34 7.3 -1.7 -1.3

USD-JPY 111.2 5.9 0.4 7.8

EUR-GBP 0.86 5.6 0.5 -4.6

EUR-SEK 10.17 4.8 0.4 0.9

EUR-NOK 10.15 8.2 0.9 -3.4

Commodities Level 3M realised

volatility

1W in % YTD in %

Bloomberg Commodity Index 101 15.9 3.8 29.9

Brent crude oil - USD / barrel 78 20.6 2.0 54.0

Gold bullion - USD / Troy ounce 1’754 13.5 0.7 -7.4

Source: J. Safra Sarasin, Bloomberg as of 30.09.2021


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central banks are becoming more vocal as inflation rises

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