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Deutsche Bank: Markets Pricing Too Strong & Persistent A Tightening Cycle

CHILE
  • Deutsche Bank believe that markets are pricing too strong and persistent a tightening cycle while underestimating demand deceleration in coming years.
  • They expect accessible pension fund balances to exhaust by the end of Q3, while high inflation (which DB expect to peak at 10% in June) continues to erode purchasing power. Real wages stagnated over the past year, and unemployment remains ~8%.
  • Moreover, financial conditions are tightening again as shown by lending surveys and rising yields. Producer prices have stabilized at ~30% YOY but DB believe CPI (~8%) has yet to peak.
  • The BCCh will likely maintain a hawkish stance with long-dated inflation breakevens ~3.75%, non-tradable and the less volatile prices still above 6%, and the new guaranteed minimum universal pension that came online in late February, benefiting those with high marginal propensity to consume.
  • Altogether, while Deutsche believe the BCCh will hike at 150bp clips in coming months – at least until inflation peaks – they will likely end below 8%.

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