Market Update

Investing.com — Markets are struggling due to surging Treasury yields and concerns that disinflation may be stalling, while growth remains solid. Deutsche Bank (ETR:DBKGn) believes markets can weather this ‘no landing’ scenario.

“Recent history tells us a ‘no landing’ isn’t necessarily the worst outcome for risk assets. After all, it’s only a problem because the data is strong, as seen with last week’s jobs report,” stated Deutsche Bank Macro (BCBA:BMAm) Strategist Henry Allen in a note.

Nonfarm payrolls increased by 256,000 jobs last month, following an adjusted 212,000 in November, as reported by the Labor Department’s Bureau of Labor Statistics. Economists had forecast an increase of 164,000 jobs, while the unemployment rate fell to 4.1%, down from 4.2% in November.

Risk assets, including stocks, tumbled last week, as global yields reached new highs, with the US 10-year Treasury yield hitting its highest level since October 2023. The increase in global bond yields comes as investors lower expectations for rate cuts, with futures pricing in just one 25 basis point rate cut from the Fed this year.

Allen attributes the recent bond selloff to inflationary data, particularly the ISM services index and a robust US jobs report. These data points heightened concerns about strong demand and inflationary pressures, prompting markets to anticipate higher rates for a more extended period.

“Ultimately, investors are waking up to the fact that inflationary pressures are still building, likely resulting in more hawkish monetary policy,” Allen added.

However, Deutsche Bank suggests that the ‘no landing’ scenario, characterized by persistent inflation above targets amid strong growth, is not a death knell for risk assets. During 2023-24, equities experienced a “relentless rally,” noted Allen, even as markets adjusted for a more hawkish rate path.

If recession risks significantly rise, markets will not view this positively, as evidenced by past cycle experiences,” Allen warned.