Too hot to handle

John Authers rightly titled today’s Bloomberg Opinion column “Too Hot to handle”. Yesterday’s US CPI figures were not dramatic, but they were uncomfortable. Headline inflation rose to 3.8%, its highest level in three years. Even excluding energy, inflation is still running at 2.8%.

This is why the US 30-year yield is back above 5%, approaching a 20 year high. Markets are not reacting to one data point, but to a difficult mix: sticky inflation, higher oil prices, fiscal deficits and a Federal Reserve with little room to cut. The Iran shock makes the picture worse, but the inflation trend had already started before the war.

Equities are holding up because the AI capex cycle remains a powerful support for earnings. But when long-term money costs 5%, the valuation argument changes. The hurdle rate rises for every asset.

This is not a reason to abandon equities. It is a reason to be more selective. In this environment, durable cash flows, pricing power and strong balance sheets matter more than ever.