Deutsche Bank warns: The accumulation of inflation and interest rate risks is increasingly exacerbating market misalignment, which may impact the stock market and credit assets.

Deutsche Bank's research department has warned that financial markets are facing an increasing disconnectwhile inflationary pressures continue to build, markets expect major central banks to implement only limited policy tightening, making stocks and credit assets vulnerable to potential repricing. In its latest report on "market dislocations," Deutsche Bank noted that the recent sell-off in bonds has pushed global bond yields to multi-year highs, yet the market still prices in a relatively mild environment, anticipating resilient economic growth, controlled inflation, and only moderate rate hikes by central banks. However, the bank believes that as energy, food, and other commodity prices continue to exert upward pressure on inflation, this balance will be difficult to maintain. The inflation environment has become particularly concerning. Deutsche Bank pointed out that ongoing tensions around the Strait of Hormuz are a key source of risk. At the time of the report, Brent crude oil was priced around $96 per barrel, up from $82.49 a month ago; meanwhile, European natural gas futures have surged to their highest levels since the beginning of 2023. Food prices also saw significant increases in August, with sugar, wheat, and corn prices all showing notable monthly gains. However, the futures market continues to price in expectations for a decline in energy prices over the next year. Deutsche Bank stated that if this expectation fails to materialize, it would lead to "serious market dislocations." The Federal Reserve is another area where Deutsche Bank believes the market may be underestimating the risk of policy tightening. The bank noted that in four of the last five years, investors have underestimated how hawkish the Fed would be. At the same time, the prices paid component of the ISM services index rose to its highest level in four years in August. Deutsche Bank indicated that historically, this level corresponds to a U.S. Consumer Price Index (CPI) inflation rate above 5%. Initially, the market anticipated that the Federal Reserve would cut interest rates twice before the September meeting this year, but no cuts occurred, and instead, the futures market increased the likelihood of a rate hike to 60%. Deutsche Bank stated that the risk is that investors could once again be caught off guard by a more hawkish Federal Reserve. The bank also pointed out that the European Central Bank faces a similar disconnect; despite stronger economic growth, rising inflation expectations, and increasing energy prices, market pricing has changed little. Even with natural gas futures rising more than 18% and Brent crude oil prices back around $96 per barrel, market expectations for further rate hikes by the European Central Bank by June 2027 have hardly shifted. Deutsche Bank also highlighted the oil futures curve. At that time, the six-month Brent crude oil contract was priced at about $83 per barrel, while the near-month contract was at $96.20, reflecting the market's expectation that the Strait of Hormuz will eventually reopen. The bank warned that if this assumption repeatedly proves false, investors may need to reassess not only oil prices but also stocks and credit assets that benefit from expectations of declining energy costs. For risk assets, Deutsche Bank stated that so far, despite rising real yields, stocks and credit assets have remained resilient, primarily due to stronger-than-expected global economic growth. However, the bank warned that inflation shocks are increasingly manifesting as negative supply shocks, which could simultaneously push prices up and weaken economic growth. For risk assets, this will create a particularly tricky environment, as policymakers have fewer tools to buffer economic downturns: high inflation above targets limits the scope for monetary policy easing; simultaneously, elevated bond yields and high debt levels also restrict the ability for fiscal stimulus. Therefore, Deutsche Bank believes that the market is in a "very narrow landing zone," with the greatest risk being that persistent inflation forces central banks to adopt more aggressive tightening policies, while rising yields begin to exert pressure on economic growth.