Deutsche Bank: Following simultaneous interest rate hikes by the three major central banks, the market may once again underestimate the endpoint of interest rates.

The Federal Reserve, the European Central Bank, and the Bank of Japan have all raised interest rates in the past two weeks, ushering in a phase of synchronized tightening of global monetary policy. Deutsche Bank macro strategist Henry Allen warned on Monday that while the market has already priced in further rate hikes, the final interest rate level in this tightening cycle may still be undervalued.

Deutsche Bank believes a key risk currently facing the market is that inflationary pressures may persist longer than expected, while financial conditions do not deteriorate in tandem with policy tightening. In this scenario, central banks would need to maintain interest rates at higher levels for a longer period to achieve the desired tightening effect.

Energy prices are a key factor in this assessment. Despite four consecutive days of declines in oil prices, Brent crude remains around $96 per barrel, and the overall rise in commodities has not yet been fully reflected in inflation data and market surveys. Deutsche Bank points out that the impact of the energy shock extends beyond oil prices themselves; if upward price pressures further transmit to core inflation and wage expectations, the decline in inflation may be slower than currently anticipated by the market.

Meanwhile, asset market performance indicates that financial conditions remain relatively loose. The S&P 500 is near historical highs, credit spreads remain narrow, and corporate financing conditions have not tightened significantly despite rising policy rates. Deutsche Bank believes this may weaken the demand-suppressing effect of interest rate hikes, putting pressure on central banks to further tighten policy.

Historical experience shows that the market often underestimates the end of interest rate hikes.

Allen specifically cautioned that this is not the first time the market has underestimated the magnitude of tightening. Deutsche Bank cited the experience of 2022, noting that investors initially expected the Fed to raise rates by about 200 basis points in the first year, but the actual increase exceeded 400 basis points. In other words, the market often fails to fully factor in subsequent policy adjustments in the early stages of a tightening cycle.

This experience is particularly noteworthy in the current environment. Compared to the situation in 2022 when inflation exceeded 8% before a significant tightening of policy was implemented, major central banks are now responding to price pressures much more quickly. Allen believes that after experiencing the last round of inflationary shocks, central banks may be more inclined to prevent inflation from spiraling out of control again, thus the policy response function may be further front-loaded.

However, higher interest rates do not necessarily mean a weakening economy or stock market. Allen points out that in 1999, while the Federal Reserve raised interest rates and bond yields rose, the S&P 500 still rose by nearly 20% for the year. Therefore, Deutsche Bank's focus is not on whether interest rate hikes themselves will end growth, but rather on whether the market has left enough room for further increases in interest rates.

If high oil prices persist, the second wave of inflation gradually emerges, and loose monetary conditions continue to weaken the effects of interest rate hikes, then the market's previous bets on interest rate cuts may need to be readjusted. At that point, bond yields, the US dollar, and the valuations of risk assets may all face new pricing pressures.

Risk warning and disclaimerInvesting involves risk; please exercise caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Any investment decisions made based on this information are at your own risk.