Towards high volatility. Analysts at Natixis explain why there will be high volatility in inflation, real interest rates and stock market indices (low and higher frequency).
Volatility of inflation
“During the energy transition, it will be very difficult to lower fossil fuel production and consumption at the same time. The mismatch, which then occurs regularly, between fossil fuel supply and demand, will lead to high volatility in energy prices, leading to high volatility in inflation.”
Volatility of real interest rates
“Nominal interest rates are rigid because central banks react little to temporary rises in inflation. This means that the volatility of inflation becomes volatility in real interest rates. If real interest rates are volatile, share prices are volatile, due to the normal negative correlation between real interest rates and equity market indices. But this is a low-frequency volatility of share prices, linked to real interest rate volatility, which in turn is linked to inflation volatility.”
Higher-frequency volatility of stock market indices
“Stock market valuations are currently high. This pushes investors to exercise caution as soon as there is negative news leading to a series of declines in stock market indices. But since real interest rates are negative and inflation is higher, it is very costly for investors to return to cash or bonds, and they return very quickly to equities. This leads to frequent declines followed quickly by upturns in stock market indices.”
