Winter is coming

Risks are everywhere at the end of the year, between the resurgence of the Covid theme and the Fed’s change of tone on inflation. It is rather the first of these risks that explains the recent risk-off market move (a post-Covid high of 89% on Tuesday for our Risk Perception Index!), markets have on the other hand accepted Jerome Powell’s hawkish pivot and his defection from the “transitory” camp rather well at this stage. While market expectations for short-term interest rates were already aggressive, we believe that the potential for a rebound in term premiums and real interest rates remains significant, especially if the Covid stress subsides a little, and if the US fundamentals (NFP and CPI to be monitored in the short term) validate the Fed’s new pivot.