Multi-Asset Class Risk Monitor Highlights | Week Ended November 12, 2021

• Inflation surge puts dent in Fed’s ‘transitory’ narrative
• Increased likelihood of a rate-hike boosts dollar
• Portfolio risk rises, as cross-asset correlations turn positive

Inflation surge puts dent in Fed’s ‘transitory’ narrative

Yields on short-dated US government bonds rose sharply in the week ending November 12, 2021, as a surge in realized inflation put another dent in the Federal Reserve’s narrative that current inflationary pressures are ‘transitory’. The Bureau of Labor Statistics announced on Wednesday that US consumer prices rose 0.8% in October, which elevated the annual headline number to 6.2%—the fastest growth in almost three decades. The core component, which excludes more volatile food and energy costs, grew at an only marginally slower pace of 0.6% month-on-month. A decline in the annual rate to 2%, on the other hand, would require average monthly price changes to be no more than 0.17%. Yield increases were most pronounced at the 5-year point of the curve, which rose by almost 20 basis points, as the corresponding breakeven inflation rate surpassed 3.1% for the first time in its 20-year history.

Please refer to Figures 3 & 4 of the current Multi-Asset Class Risk Monitor (dated November 12, 2021) for further details.

Increased likelihood of a rate-hike boosts dollar

The US dollar appreciated by nearly 1% against a basket of foreign currencies, as futures traders forecast an 80% likelihood that the Federal Reserve will raise its Federal Funds target by at least 0.25% by July next year. This compares to an implied probability of only 13% right before the FOMC meeting on September 21-22. The move propelled the greenback to a 16-month high against the euro, reflecting the differing monetary-policy expectations in the two regions. Despite Eurozone headline consumer prices having risen at the same month-on-month rate of 0.8% as their American counterparts, European short-term interest-rate markets do not seem to expect the European Central Bank to touch its policy rates before December 2022.

Please refer to Figure 6 of the current Multi-Asset Class Risk Monitor (dated November 12, 2021) for further details.

Portfolio risk rises, as cross-asset correlations turn positive

Predicted short-term risk in Qontigo’s global multi-asset class model portfolio rose half a percentage point to 6.9% as of Friday, November 12, 2021, as the benefits of lower equity volatility were offset by stronger interest-rate fluctuations, as well as an increased co-movement of bond returns with both share prices and exchange rates. Consequently, the fixed income holdings saw their combined share of overall portfolio volatility surge from 16% to 25.7%. Global index-linked government bonds were once again the riskiest debt category, accounting for 7.8% of total risk, relative to their monetary weight of 5%. High yield corporates, on the other hand, appeared to provide the greatest diversification benefits—alongside the Japanese yen—as credit spreads remained inversely related with risk-free interest rates.

Please refer to Figures 7-10 of the current Multi-Asset Class Risk Monitor (dated November 12, 2021) for further details.