Economic Situation & strategy
August 4, 2023

Capital markets: It depends on inflation and interest rates

Surprise coup instead of a summer slump: Although the US economy is doing better than expected this year and the recession that many have been predicting has not materialized so far, the US rating agency Fitch downgraded the US credit rating from “AAA” to “AA+” and the global stock markets thus sent on a descent. The downgrading of the credit rating will certainly damage the image of the United States, but we consider it unlikely that there will be any major, lasting consequences. We do not see the position of the US dollar as the global key currency or the fundamental attractiveness of US government bonds being jeopardized by the poorer rating, but the question arises for investors whether an investment in US Treasuries means price gains in addition to the coupon or - can/must expect losses. The answer to this question depends to a large extent on the future monetary policy of the central bank. Higher key interest rates or expectations of a more restrictive monetary policy normally lead to rising interest rates and capital market yields and vice versa. Since all central banks are committed to maintaining price level stability, the future development of inflation plays a key role in forecasting monetary policy and interest rates.

Looking at consumer prices in the euro zone and the US, it is noticeable that the inflation rate in the US is falling faster and more sharply than it is in Germany. The US Census Bureau also provides an alternative calculation method for US inflation. This is based on the HICP inflation used in the euro zone, which uses a "harmonized index of consumer prices". This differs from the US CPI index mainly in that it excludes the imputed rents that property owners would theoretically have to pay. The US HICP inflation rate was only 1.4 percent in June, the core inflation rate was 2.3 percent. But the price pressure is not only easing in most industrialized countries; a positive development can also be seen in many emerging countries.

Since the price statistics are all highly correlated, i.e. closely synchronized, we assume that inflation will also fall in Germany and the euro zone in the coming months. Significant disinflationary developments can already be observed at the preliminary stages of consumer prices, ie at producer, wholesale and import prices. Lower inflation rates therefore also indicate lower interest rates!