Markets May Be Pricing In A Fictional 'Goldilocks' Scenario, Deutsche Bank Warns

Deutsche Bank's macro strategist Henry Allen is warning that financial markets may be pricing in a scenario that doesn't exist. He believes equity, credit, and rates markets are collectively telling a story that may not hold up to reality.

The core tension lies in the fact that markets are simultaneously pricing in robust economic growth and limited additional tightening from the Federal Reserve, despite core PCE inflation remaining above the Fed's 2% target. Allen argues that this is a fragile equilibrium that could be broken by fresh inflation data or the Jackson Hole Economic Policy Symposium.

The July Personal Consumption Expenditures report is expected on August 26, with consensus estimates pointing to a 0.2% month-over-month increase in core PCE, translating to 3.3% on a year-over-year basis. Headline PCE is forecast at 0.1% month-over-month, or 3.6% annually.

Allen's warning comes as the September FOMC meeting looms, and he notes that even a mildly disappointing inflation result could cause outsized damage across multiple asset classes.