Towards high volatility. Natixis analysts explain why there will be high volatility in inflation, real interest rates and stock market indices (low and high frequency).
“During the energy transition, it will be very difficult to simultaneously reduce the production and consumption of fossil fuels. The mismatch, which then occurs regularly, between supply and demand for fossil fuels, will lead to high volatility in energy prices, leading to high volatility in inflation.
Volatility of real interest rates
“Nominal interest rates are rigid because central banks react little to temporary increases in inflation. This means that the volatility of inflation becomes the volatility of real interest rates. If real interest rates are volatile, stock prices are volatile, due to the normal negative correlation between real interest rates and stock market indices. But it is a low-frequency volatility of stock prices, linked to the volatility of real interest rates, itself linked to the volatility of inflation.
Higher frequency volatility of stock market indices
“Stock market valuations are currently high. This prompts investors to be cautious whenever there is negative news leading to a series of stock index declines. But since real interest rates are negative and inflation is higher, it is very costly for investors to switch back to cash or bonds, and they switch back to stocks very quickly. This leads to frequent declines followed quickly by stock market index increases. “