DAX opens higher as bond yields approach the pain threshold

Investors are increasingly focusing on the interplay between prices and economic growth. The risk of stagflation can no longer be ignored: while high energy prices are keeping inflationary pressures elevated, the first signs of weakness are emerging in consumer spending.

At the same time, growing inflation concerns are pushing bond yields higher. They are now approaching levels that could represent a pain threshold for many investors. Yields of more than 5% on 10-year government bonds are becoming serious competition for equities. The more attractive the risk-free rate becomes, the more high-growth stocks need to justify their elevated valuations with strong revenue and earnings growth.

Against this backdrop, today’s economic and inflation data from Germany and the US are attracting considerable attention. German retail sales kicked off the data calendar by falling short of expectations. Yesterday’s US data had already painted a similar picture. The sharp rise in energy prices in recent months increasingly appears to be weighing on purchasing power and, in turn, consumer sentiment.

At the same time, price pressures remain elevated. German import prices rose more strongly than expected both month-on-month and year-on-year. It is precisely this combination that is making investors nervous: consumer spending is losing momentum while inflationary pressures are not easing at the same pace. Inflation fears are therefore increasingly turning into stagflation fears.

Attention now turns to the corresponding data from the US. In particular, the closely watched PCE deflator is likely to determine whether upward pressure on bond yields intensifies further. For equity markets, today is therefore less about whether the economic data are good or bad, and more about the reaction they trigger in the bond market.