Exposure rates of the Dorval Asset Management Range – 17th December 2021

Rising inflation in the second half of 2021 has prompted the main central banks to review their 2022 and 2023 inflation projections and adjust their approaches accordingly. However, long-term yields are remaining remarkably stable across the board.

Credit where credit’s due, the Fed set the ball rolling on Wednesday December 15, as it stepped up the pace of tapering and signaled three rate hikes in 2022. However, short-term rates should stay below inflation until 2024 (cf. chart 1) according to the central bank’s projections. Real rates are therefore poised to remain negative for another two years, which does not look like much of a threat for the economy.


The more jittery observers of inflation will say that the Fed has failed to do enough, and that much swifter and more prolonged tightening is needed to get a grip on inflation again, no doubt at the expense of a rise in unemployment and a sharp economic slowdown, or even a recession.


However, the bond market does not hold with this scenario. Rather, the Fed’s short-term rate projections are now above figures priced in on the yield curve (cf. chart 1). It is as if investors believed that the Fed had already turned restrictive, and logically long-term yields remain very stable.



The Fed still not very aggressive on inflation,
but is no longer lagging behind the market

Inflation – or core PCE – expected by the Fed
Fed Funds expected by the Fed
Fed funds expected by the market (Fed funds futures)


However, it is worth remembering that there are other sources of stress at the moment i.e. on the pandemic outlook with Omicron, the geopolitical position with Ukraine-Russia relations and the USA-China, and lastly the financial situation with the collapse in the Turkish lira, which has plummeted 50% since September. These various factors have all combined to dent risk appetite on the equity market to the benefit of the long end of the sovereign bond yield curve.


Positive factors include the rebound in US automotive production (cf. chart 2). The loss of production YTD now only stands at 5% – vs. 15% in September – indicating that electronic component shortages are beginning to ease. This trend should continue in 2022 and end up stabilizing prices on both new and used cars, which have taken a major upturn since the start of the year.



The rebound in US automotive production in October/November marks the start of easing in supply difficulties

Manufacturing output, automotive sector (USA)


If this trend in the automotive sector is borne out and broadens, it will provide the necessary impetus for a slowdown in inflation right throughout 2022. This impetus will be particularly important as tensions on manufacturing prices remain extremely high according to business surveys (cf. chart 3).



US manufacturing companies continue to report major pressure on prices
Balance of opinions – business outlook survey with companies in the Philadelphia region

Prices paid / prices received


In the midst of these conflicting aspects, we have made no major changes to our risk exposure – which remains moderate – or our investment themes this week.



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