Deutsche Bank macro strategist Henry Allen says markets are underpricing how much more tightening the Federal Reserve and other central banks will need to deliver. Inflation data and a tight labor market both point to a steeper rate path than what is currently priced in.
Deutsche Bank's Henry Allen says markets have priced in a soft landing that the data doesn't support. The macro strategist warned this week that investors are significantly underestimating how much inflation-fighting tightening the Federal Reserve and other central banks will still need to deliver.
The gap between data and pricing
PCE inflation, the Federal Reserve's preferred gauge, ran at 3.7% in June 2026, nearly double the central bank's 2% target. Market pricing, however, only bakes in roughly 31 basis points of Fed rate hikes through December 2026 — thin cover for a central bank still fighting inflation at that level.
The US ISM services index shows prices paid by service-sector businesses rising at the fastest pace since inflation peaked post-pandemic, when CPI briefly touched 5%. Services inflation tends to be sticky, lingering after goods prices cool.
Allen has flagged this disconnect since August. He points out that historical tightening cycles under comparable inflation conditions required more than 100 basis points of hikes, well above the path markets currently imply.
What Deutsche Bank expects instead
Deutsche Bank's base case calls for two 25-basis-point Fed rate hikes in September and December 2026, lifting the federal funds target to about 4.1%. The bank expects the ECB to follow with its own tightening because of persistent energy-driven price pressures across Europe.
A tight labor market complicates the picture. The unemployment rate stood at 4.1% in July 2026, historically low, and tends to sustain wage growth that feeds into sticky services costs. Allen also pointed to the Middle East conflict and supply chain disruptions as ongoing upward pressures on oil, gas, food, and metals prices.
A warning for risk assets
Valuations priced for a near-perfect soft landing look vulnerable if the rate path turns out steeper than expected, Allen argues. According to Deutsche Bank strategist Henry Allen, "something will have to give."
Markets were pricing the Fed funds cycle peak at just 47 basis points above current levels by mid-2027, per Allen's August commentary — a modest adjustment given the inflation backdrop.
Source: Crypto Briefing
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