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As expected, the Governing Council at the European Central Bank (ECB) left its policy stance unchanged at its first meeting of 2022. However, there was a notable hawkish pivot, which suggests the ECB will alter their behavior from a “predictable forward guidance” central bank to one that is more reactive and “data dependent.”

One of the most salient economic consequences of the COVID-19 pandemic has been the sharp disruption of global supply chains. The evolution of these disruptions present significant market implications given its effect on the inflation outlook and the policy response. A more benign inflation outlook from these sources should reveal compelling opportunities as markets price in prolonged inflation and substantial monetary policy tightening.

Euro area HICP inflation continues to come in higher than expected, with the most recent data confirming a growing trend of inflation “surprises” over the past year. While some investors believe that the European Central Bank (ECB) is behind the curve and needs to tighten policy, our analysis shows that the ECB has ample reason to tread carefully.

The Fed’s urgency to unwind its stimulus is apparent on multiple fronts. Accelerated tapering, looming rate hikes, and, most recently, projected quantitative tightening are on the docket as the Fed looks to tamp down inflation. In addition to comparing this QT to the 2017-2019 experience that ended in a U-turn, this post also provides our base case for rate hikes as well as an illustrative asset runoff from the Fed’s balance sheet.

Almost two years into the COVID pandemic, we remain in a world that is ripe with exogenous risks. This environment requires a constant probing and re-probing of our core views given the significant risks on the horizon that have the potential to create a sea change in market dynamics. In our last blog post for the year, the following highlights three key macroeconomic risks that we are focused on heading into 2022.

A few weeks ago, the UK faced a severe shortage of CO2 precipitated by the idling of two fertilizer plants due to high energy costs. The chain of events leading to this unexpected shortfall provides a cautionary lesson for the increasing number of investors and regulators employing top-down, passive models to measure climate risks in fixed income portfolios. Although such models appear sophisticated, they suffer from at least three major flawed assumptions and serve as another reminder of the risks involved with passive approaches to research and portfolio management.

As central banks have accelerated their efforts to understand the costs and benefits of issuing a digital version of their own currency, the European Central Bank has moved to the forefront by formally launching an investigation into the creation of a digital euro. Whatever the outcome, the process will likely take several years, as central banks have to catch up with the fastmoving technology of launching a digital currency, demonstrate due diligence to maintain trust, and ensure the public is adequately consulted. In addition to gauging the potential implications of a digital euro, this blog considers whether this concept is an evolution of money or much ado about nothing.

The COVID pandemic exacerbated the dual debt/climate threat as governments faced increased social spending pressures and revenue shortfalls. Not only did the imbalance leave less fiscal space to improve climate resiliency, it also necessitated more urgent discussions on improving debt sustainability in highly indebted EM countries. While debt-for-nature swap transactions will likely be most effective in countries with smaller debt loads, there is scope for many countries to consider these programs as they confront the looming risks of rising debt burdens and climate change.

Our recently published Q4 Outlook described a rapidly evolving, yet increasingly uncertain, macro backdrop highlighted by persistent inflation, supply chain gridlock, virus mutations, and soaring energy prices. As a complement to our market perspectives, the following outlooks on the media, consumer staples, auto, and energy sectors reveal the extent to which investment-grade credit conditions are evolving with the macro uncertainty.

One of the ECB’s key policy tools introduced during the depths of the virus-related downturn—the Pandemic Emergency Purchase Programme—is scheduled to conclude at the end of March 2022. The looming cliff-edge, which will see a reduction in purchases from around €80 billion per month to €20 billion per month by Q2 of next year (if policy is left unchanged), places the ECB on the precipice of three potential scenarios as we look ahead.

Following a brief COVID-related interruption, corporate M&A activity is setting new records and has become a key factor to monitor across corporate debt allocations. Although the credit effect of an acquisition can cut two ways, the revival of acquisition activity has continued through the first half of 2021. Against this backdrop, we assess the M&A effects on high-yield issuers and how an active M&A market is likely to remain a tailwind for the U.S. high yield market.

Rather than fueling anxiety about QE tapering and higher interest rates, the markets continue to see the Federal Reserve’s measured approach to removing monetary policy accommodation as a stabilizing force, likely to protect the economic expansion and stabilize inflation. As a result, we see good prospects for the continued favorable credit market performance as rates and spreads remain relatively range bound around current levels.

In the face of the substantial swings in oil prices since the pandemic, this post examines the well-known relationship between the movements of oil and the U.S. dollar with the goal of determining whether the oil price shock has upended the dynamics between the two assets.