The Rates vs. Equity View of Inflation

Equity investors tend to focus on the upcoming earnings season, i.e., the next three months. This is in contrast to rates investors who normally have a longer horizon, focusing on the next few years.

This fundamental difference in perspective is likely why the uncertainty about the inflation outlook is having a much more significant impact on volatility in rates relative to equities, see chart below.

Rates markets tell us there is a lot of disagreement about where inflation will be over the coming years. And equity markets are saying that inflation will not be a problem for corporate earnings in the future.

We are tracking this divergence in views very closely. Because if inflation is going to be a problem, it will also impact corporate earnings and hence equities.

In short, either inflation is a problem or it is not a problem. Inflation cannot be a problem in rates markets but not a problem in equity markets.

Chart showing divergence between what the credit and equity markets are saying about inflation
Source: Bloomberg, Apollo Chief Economist