Repricing of Rates, VAR Shocks, and the Dollar

IN THIS PUBLICATION:

• Central Banks will try to fight inflation with monetary policy.
• However, given that the current inflationary environment is primarily driven by supply chain issues, monetary policy is unlikely to be effective.
• This hawkish stance by Central Banks can create risks that are better hedged through the bond market than the equity market.

The Short-End Repricing of Rates

Some hawkish action lately that’s important to flag: The Fed, as expected, announced on Wednesday that it will begin tapering (i.e. start scaling back) its $120 billion monthly bond-buying program by $15 billion in November and another $15 billion in December. The Fed will target to end the overall monthly purchases by June 2022.

• This is in line with what the Central Banks of Australia and Canada have done, albeit in a more moderate way.
• Although the BoE held interest rates at yesterday's meeting, market expectations imply that it will soon raise rates, possibly at the December meeting, for the first time since 2018.

This has led to noticeable price action: