Bond yields, currency swings, and inflation readings sharpen stagflation concerns
Stagflation risks in the United States are moving to the forefront of global markets, raising alarms for investors managing long-term portfolios.
According to a survey conducted by BofA Global Research in early August, 70 percent of global investors expect stagflation — below-trend growth paired with above-trend inflation — within the next 12 months.
Evidence of this pressure has already appeared.
As reported by Business Insider, the US economy added only 73,000 jobs in July, below forecasts of 100,000, while revisions for May and June cut another 258,000 positions.
RBC economists wrote that the payroll losses, concentrated in tariff-exposed sectors, signalled their “stagflation lite” scenario was taking shape.
Initial jobless claims rose to 226,000 in the week ending August 2, with continuing claims reaching 1.97 million, the highest since the pandemic.
Inflation readings have also exceeded expectations.
Business Insider noted that the Fed’s preferred Personal Consumption Expenditure gauge increased 2.6 percent year-over-year in June, higher than the 2.5 percent forecast and up from May’s 2.4 percent.
“The Fed’s key measures of inflation are no longer in obvious decline … the US economy appears to be hitting a mild form of stagflation,” wrote Skanda Amarnath, executive director of Employ America.
Bloomberg added that the consumer price index rose 2.7 percent in June, with July estimates pointing to 2.8 percent.
Tariffs remain central to the outlook.
Bloomberg reported that US President Donald Trump’s sweeping tariff package took effect in early August, raising costs that are expected to feed into consumer prices.
Bank of New York Mellon strategist Geoffrey Yu wrote that “the still-evolving tariff region will prove stagflationary, both lowering growth and raising inflation.”
Minneapolis Fed President Neel Kashkari acknowledged that tariffs could even shift policy toward further rate hikes, saying, “The tariffs are just such an unknown right now.”
Bond markets are particularly exposed.
Reuters reported that Paul Eitelman of Russell Investments said pension funds and insurers had become increasingly nervous about inflation eroding the value of bond portfolios.
Mayank Markanday of Foresight Group added that G7 bond curves are closely correlated, meaning a US selloff could spread across major economies.
While two-year yields in the US, Germany, and Britain have fallen this year, 30-year yields have climbed, reflecting pressure at the long end of the curve.
Fidelity International’s Caroline Shaw said stagflation was one of their two core scenarios and noted that in July they hedged with put options on the Russell 2000 small-cap index.
State Street strategist Michael Metcalfe observed that since 1990, world stocks have fallen an average of 15 percent when US manufacturing showed contraction alongside rising prices.
Yet for now, stocks remain near record highs.
“The disruption to the global trading system isn’t going to disrupt big tech earnings,” Metcalfe said.
Currency markets have already reacted.
Nabil Milali of Edmond de Rothschild Asset Management said stagflation posed “twin risks” for the US dollar, as weaker growth can depress value and inflation undermines purchasing power abroad.
According to Reuters, the euro has gained more than 12 percent against the dollar this year, with the yen and pound also strengthening.
Some investors are looking to hedges.
Man Group strategist Kristina Hooper said stagflation could provide another reason to buy gold.
Markanday pointed to short-dated inflation-linked bonds, while Eitelman highlighted demand for derivatives such as inflation swaps, which rise in value when price indices surpass certain levels.
Reuters noted that the US two-year inflation-linked swap is near its highest in more than two years.
Despite rising risks, markets continue to show resilience.
“Stagflation is in the mind of the market, but not the price,” said Carmignac fixed income manager Marie-Anne Allier in comments reported by Reuters.
