Investing.com — Global equities have struggled this week as oil prices pushed above $100 a barrel, reigniting inflation concerns and lifting market-implied odds of a Federal Reserve rate hike next week to about 70%.
According to Barclays strategists led by Emmanuel Cau, Friday’s CPI release remains “pivotal,” with Barclays economists expecting core CPI to have risen 0.23% month-over-month in August. A print in line with that forecast “would not preclude a hike next week,” the strategists said, with Barclays economists now expecting two Fed hikes by year-end.
The strategists said a benign inflation print would align with the more dovish tone recently struck by Fed officials Waller and Williams, potentially giving the Fed room to hold rates. But they warned that as long as energy prices stay elevated, “markets are likely to continue pricing the risk of further tightening down the line,” leaving policy uncertainty unresolved and creating a headwind for equities and duration assets.
Conversely, a hike could ultimately reduce uncertainty by clarifying the Fed’s reaction function and the likely terminal rate. While Barclays acknowledged the initial market response could be mixed, it noted that “equities eventually tend to regain the uptrend soon” after the Fed resumes mid-cycle hiking, framing next week’s potential move as “a clearing event for markets.”
The bank also flagged stagflation risk in Europe, citing a strengthened negative correlation between equities and oil. Rising ahead of winter, combined with relatively tight storage levels, are adding to European inflation concerns.
This isn’t a repeat of 2022 “yet,” the strategists said, noting that elevated energy costs aren’t unique to Europe and that EU corporates have made progress diversifying their energy mix. The team also pointed to a recovery in German activity, supported by fiscal stimulus, as a cushion for regional demand.
The European Central Bank’s (ECB) hike this week reflected growing inflation concerns but also acknowledged a strengthening growth backdrop, the strategists noted. Barclays economists expect one more ECB hike in December, with further tightening possible if energy prices remain elevated and growth holds up.
Given this backdrop, Barclays said it continues to favor “old economy” capex beneficiaries and banks, while remaining Overweight the banking sector. The firm also cited Utilities and Telecoms as increasingly attractive bond-proxy plays, noting that in Telecoms, “earnings momentum is improving and much of the rates risk already appears reflected in valuations.”