The hawkish risk: How markets keep underestimating the scale of rate hikes

With the Fed, ECB and BoJ all hiking in the last two weeks, it's clear we're back in a globally synchronised rate hiking cycle, with markets pricing more to come. But, even though hikes are underway, there are credible reasons why investors risk underestimating the scale of the tightening ahead. The report outlines four hawkish risks: (1) recent gains in commodity prices, with oil and gas posting some of the biggest rises and Brent crude still at $102/bbl, are not yet reflected in inflation data or surveys which mostly only run to August, and energy shocks are prone to second-round effects; (2) central bankers tend to correct (and often overcorrect) for the last crisis, and are already showing a more hawkish reaction function, having begun hiking with inflation less than half the level seen in 2022, with Fed Chair Warsh noting inflation has run above target for more than five years;