You keep hearing it: markets are “priced for perfection”. Deutsche Bank reckons that’s wide of the mark and some risk are being underestimated.
For a start, gold is at record highs; and not just in nominal terms, but in real, inflation-adjusted terms too.
That’s usually a sign of fear, not euphoria. The last time gold looked like this was in 1980, when the US was heading into recession and Paul Volcker was taking a sledgehammer to inflation.
Compare that with the late-1990s dot-com bubble, when gold was languishing at multi-decade lows and everyone wanted high-growth assets instead.
Inflation expectations don’t tell a “perfect” story either. US swaps still point to consumer prices running above the Federal Reserve’s target for the next couple of years.
That caps the room for aggressive rate cuts,but also means there’s scope for a bond rally if inflation undershoots, just as it did in late 2023.
Trade and politics remain messy. Tariffs on sectors such as pharmaceuticals and semiconductors are still under review. The temporary reprieve on US-China levies expires in November, so the risk of another flare-up hangs over the market.
And the jobs data aren’t reassuring either: the six-month average for payroll growth has dropped to its weakest level of this cycle, with unemployment now 4.3%.
When the August jobs report revealed big downward revisions, US high-yield credit spreads jumped by their widest margin since the spring tariff shock.
Investors are indeed pricing in more than 100 basis points of Fed cuts by the end of 2026. But that looks less like a vote of confidence than a hedge against weaker growth.
Again, think back to the late 1990s: then, strong demand had real yields climbing and the Fed was tightening policy. Today, yields are slipping as central banks cut in response to labour-market weakness.
Deutsche’s bottom line is that far from a world where everything is rosy, markets are alive to the risks.
Gold at record highs, rate cuts priced in and shaky jobs data are hardly the stuff of perfection. The risk-reward balance may still tilt to the upside if some of these fears ease.