On January 11, BlackRock said it expects countries to coexist with inflation rather than hitting the brakes by raising interest rates to restrictive levels. The Fed has already signaled three rate hikes this year (more than we expected), and the market seems ready for a rate hike that equals a drag on stocks. What really matters is that the Fed has been signaling a small rate hike, which didn’t change last week.
In our view, this historically benign response to inflation should keep real policy rates low, supporting equities. We prefer equities and will use the pandemic-related sell-off to add risk. We are underweight DM government bonds (yields are gradually higher, but remain historically low).