BNY’s Geoff Yu argues that developed market central banks, especially in Europe, are unlikely to deliver all priced rate hikes as weaker household demand emerges as a key second-round effect of the conflict. iFlow data show consumer discretionary as the worst-performing DM sector, while Utilities and other pricing-power sectors in DM and EM attract better flows, with EM hedge ratios likely to stay elevated.

Consumer discretionary lags as Utilities lead

"We remain deeply skeptical that developed market (DM) central banks – especially those in Europe – can come close to matching expectations for multiple hikes for the rest of the year. Officials from the Federal Reserve, Bank of England and European Central Bank have all critiqued interest rate pricing in recent sessions, highlighting the high level of uncertainty surrounding energy prices, while seeking to draw a clear distinction between the current state of their economies and the situation in 2022 to 2023."

"Crucially, household demand is much weaker and looks set to deteriorate further – one of the immediate second-order effects from the conflict. Central banks are resigned to this and issuing pointed stagflation warnings."

"It should come as no surprise that iFlow shows consumer discretionary has been the worst-performing DM sector since the beginning of the conflict, as this is where the cutbacks are immediate in a supply shock."

"On the positive side, sectors with sufficient pricing power to pass on increases in energy will benefit the most. Utilities is a strong performer in both DM and emerging markets (EM), which are seeing better flows recently."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)