Until inflation moderates and the Fed prioritises growth risks, the current rally in risky assets is likely to prove unsustainable. But it is expectations of peaking inflation and a dovish interpretation of the last FOMC meeting that explain why equities and credit markets rebounded in July. However, after several speeches by Fed governors, who have tried to correct the dovish impression that Chair Jerome Powell apparently created, and the much better-than-expected July payrolls data, investors have already started to move away from the idea that the Fed has reached peak hawkishness.
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