Markets Underprice Rate Hike Cycle: Deutsche Bank Strategist

Deutsche Bank strategist Henry Allen has sounded a warning about financial markets underpricing how far central banks may need to raise interest rates. In his view, there is a widening gap between current pricing and inflationary pressures building across major economies.

Allan pointed out that the current market pricing of just two additional Fed rate hikes by July 2027 contrasts with Federal Reserve Chair Kevin Warsh's own acknowledgment that inflation has run above target for more than five years without meaningful improvement.

He highlighted a range of inflationary signals, including rising oil, gas, food and metals prices, alongside an ISM services index showing input cost pressures at levels last seen when US CPI inflation was running near 5%.

Allan argued that financial conditions remain unusually loose for this stage of a tightening cycle, noting the S&P 500 trading near record highs and credit spreads holding tight. This suggests more aggressive rate hikes may ultimately be required to bring inflation down.