Forget Hard Landing, Trade Re-Inflation in Global Markets

Recently, the latest U.S. Non-Farm Payrolls (NFP) report has shown a strong performance, which has significantly eased market concerns about a hard economic landing. At the same time, with the robust performance of the labor market and the rebound in oil prices, the market is refocusing on reflation expectations.

Under this expectation, Citi analyst Dirk Willer believes that risk assets and the U.S. dollar will benefit, while long-duration bond assets may come under pressure:

The market's concern about a hard economic landing has been replaced by reflation expectations, mainly due to the robust job market and rising oil prices. The reflation scenario is favorable for risk assets and the U.S. dollar, but not for long-term bonds.

Forget about a hard landing, trade reflation

Willer mentioned in the report that the recent NFP report has shown a strong performance, which has completely dispelled the market's concerns about a hard landing of the U.S. economy. The market has returned to expectations of a soft landing and reflation.

Willer added that Citi economists have been closely monitoring the risk of a hard landing triggered by a weak job market, but the latest data shows that other U.S. economic indicators had already started to improve at the beginning of this year, in addition to the job market. This shift is driving the market to reassess the economic direction and investment strategies.

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Moreover, the factors supporting reflation expectations do not only come from the job market—the significant rebound in oil prices has also raised reflation expectations. In addition, Willer believes that China's proactive fiscal policy has also played a role in fueling the trend.

In terms of asset prices, risk assets generally perform well in the context of reflation. Willer wrote:Based on our research, if the market continues to trade on reflation, it is expected that the performance of U.S. stocks and credit markets will be outstanding in the next three months, especially basic metal commodities will also benefit.

Duration assets, especially U.S. Treasury bonds, will perform poorly, and the U.S. dollar will continue to strengthen.

In terms of industries, the technology, industrial and financial sectors are expected to lead the market.