Powell’s Curve

  • 15 November 2021 (5 min read)

Key points

  • COP26: rendez-vous in Sharm El-Sheikh.
  • For all the volatility in the US bond market, the Federal Reserve (Fed) is retaining its credibility. This is one of the reasons why Biden should re-appoint Powell.
  • Watch the new Covid flare-up in Europe, as well as the EU’s Eastern border.

COP26 left a lot of “unfinished business” and governments are now requested to produce new Nationally Defined Contributions to decarbonization, with a focus on 2030, by the next COP in Sharm El-Sheikh at the end of next year. Optimists will probably choose to focus on the fact that finally, fossil fuels and particularly coal are now explicitly targeted, but the contorted wording leaves a lot of room for interpretation. Yes, the general “direction of travel” is clearer, but attention should shift from “big international events” to closely monitoring implementation country by country.

For all the volatility of the last few weeks, we think a clear narrative is emerging from the US bond market. Investors believe the Fed will be forced into an “early rate lift-off” – that’s the reading from 2-year yields - but judging by market-based inflation expectations, they also think this will be enough to avoid a persistent shift in the inflation regime above the Fed target. This explains as well why the 10 to 30-year segment of the curve has tightened these last few weeks. At the same time, judging by the strong showing of the equity market, investors don’t believe pre-emptive rate hikes by the Fed would cost much in terms of economic growth. In other words, the Fed remains fully credible. As much as we think the market is both too aggressive in its pricing of the Fed and too sanguine about the possibility of a “bloodless monetary tightening”, the Fed’s credibility is one of the reasons why we believe it is strongly in Joe Biden’s interest to re-appoint Jay Powell. Replacing him with a “true dove” would probably trigger a further drift in long-term interest which would be detrimental to the US government’s borrowing costs, while stoking inflation fears in the population would not do much to help Biden’s shaky polls.   Meanwhile, the European Central Bank (ECB) is not demonstrating such a strong grip on the market, and the “mood music” coming from the hawks is being noticed by the market.

While the ECB is mulling its December announcements, the new flare-up of the pandemic in the North of the Euro area could alter slightly the short-term macro outlook.  While we think that the response will be more conversion to the “Franco-Italian model” (strict enforcement of sanitary passes), which would avoid far-reaching and economically destructive lockdowns, some impact on consumption can emerge as worried households would self-restrain on their spending in the most affected areas. We also need to keep an eye on developments on the eastern European Union (EU) border, even though the latest statements by V. Putin have been reassuring.

Download the insight
Download report (567.67 KB)


    This website is published by AXA Investment Managers Asia (Singapore) Ltd (ARBN 115203622) (“AXA IM Asia”). AXA IM Asia is exempt from the requirement to hold an Australian Financial Services License and is regulated by the Monetary Authority of Singapore under Singaporean laws, which differ from Australian laws.  AXA IM Asia offers financial services in Australia only to residents who are “wholesale clients" within the meaning of Corporations Act 2001 (Cth).

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    All investment involves risk , including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested.