NEW YORK (HedgeWorld.com)–Plenty of liquidity with no threat of inflation, a circumstance that was useful to some hedge funds in the past two years, can no longer be expected. But changes in the economy may be beneficial to other strategies.
Consumer price index data released today confirmed that prices are moving up at a swifter pace. Monetary policy has become less accommodative, and the threat of inflation will cause the Federal Reserve to tighten some more, said Larry Kantor, chief economist and market strategist at Barclays Capital, speaking at a conference.
Global demand is pushing up commodity prices. In the United States, growth of real output has slowed down, while demand is going strong, giving inflation a boost.
The Fed's tightening of rates so far has not shown an effect on spending or credit growth or asset prices, said Mr. Kantor. Hence it has a long way to go.
New Environment
In view of these conditions, recent moves in long-term yields and sell-offs of bonds appear to be just the beginning of a trend. "We expect much more to come," said Bulent Baygun, head of U.S. fixed-income strategy at Barclays.
As for foreign exchange markets, volatility is going to increase dramatically, said Steven Englander, Barclays' chief FX strategist for the Americas. He sees market participants acting as if the placid environment is going to continue, even though that is very unlikely.
