Fund managers warn of market capitulation to inflation expectations in Europe

Fund managers are warning that the market is becoming resigned to inflation expectations in Europe, as the prospect of a recession has made bond hoarding more attractive

Inflation forecasts in Europe

Government debt has risen sharply from its lowest level in June, as economic expectations worsen and concerns about rising consumer prices subside.

firm that inflation has accelerated to a record high of 8.9%.

Markets are valuing a peak of around 10% in September, according to Nordea Bank Abp.

While the worst is yet to come in Europe, strategists believe policy makers may raise rates more aggressively than many expect, fueling a bond rally that some say has gone too far.

Nordea Bank expects German two-year bond yields to rise to 1.1% by the end of the year, nearly double the current level.

Nick Sanders, portfolio manager at Alliance Bernstein, sees the fair value return at 0.8%, saying that so far, the market hasn't accurately reflected nor taken into account the magnitude of the gains.Reasons for optimism

There are also reasons to be optimistic about improving inflation expectations in Europe. Christiansen indicates that the demand for goods is declining, expecting that there will be a decline in prices in some categories next year.

But he added that there is a risk that price pressures will be more persistent than expected due to the region's energy crisis. It is also possible that supply side challenges will continue to dominate the decline in demand.

Earlier in August, financial markets showed that traders were expecting gains of another 100 basis points, nearly half of what was forecast in late July.

To Adam Korbel, interest rate strategist at Societe Generale SA, that sounded very pessimistic.

He wrote in a recent note: “Eurozone stagnation is not inconsistent with persistently high inflation, especially if the stagnation is caused by massive disruptions to gas supplies. In an environment accompanied by stagflation, monetary policy should be neutral rather than accommodative.”