Overview:
Inflation currently is more evident in the financial markets than in the real economy, as investors worry about the eventual price of the current reflationary policies of global central banks. We expect inflationary pressures, and tighter monetary policy, to build first in the developing economies. The most recent communiqués from the Federal Reserve, the European Central Bank (ECB) and the Bank of England (BOE) indicated that higher interest rates in developed countries are coming later rather than sooner, which we view as a positive signal for risk taking.

As we assess the risk case surrounding the pace of the global central banks' exit strategies, we think there is a small chance that the Fed will tighten more quickly than markets anticipate and that this could be disruptive to risk assets. Should developments over the next several months raise the probability of this outcome to a more likely scenario, we would assess portfolio changes to help reduce exposure to a market environment that we would expect to become more challenging.

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