Stagflation risk is a real concern today… We are looking at a supply shock layered on top of a supply shock. And the nature of the new supply shock—centered on energy—suggests not only that inflation will move even higher and likely prove more persistent moving forward, but also that growth will take a hit.
- Philipp Hildebrand-Blackrock
On US policy risk, we speak with Eric Rosengren, former President of the Boston Fed, and our own Jan Hatzius, both of whom agree that policy-induced recession risk in the US has grown. But Hatzius and GS’s David Mericle believe that fiscal policy poses the larger recession risk today, and Mericle argues that a US recession would likely be mild.
Rising stagflation risks in the U.S. and Europe are raising the possibility of a “lost decade” for the 60/40 portfolio mix of stocks and bonds, historically seen as a reliable investing choice for those with moderate risk appetites.
Signs of stagflation worries are evident in rates markets. The 10-year U.S. breakeven inflation rate, a gauge of inflation expectations, has reached its highest level since the 1990’s, according to Goldman Sachs. Meanwhile, inflation-adjusted real yields remain near their lowest in decades, reflecting pessimism about economic growth in coming years. And the widely followed spread between 2- and 10-year Treasury yields is inching its way closer to an inversion, typically a harbinger of recession.