Deutsche Bank warned that investors may be underestimating how far the current global tightening cycle will ultimately go. According to Sina Finance, macro strategist Henry Allen said the Federal Reserve, the European Central Bank, and the Bank of Japan have all raised rates over the past two weeks.

The bank said commodity prices remain elevated, with Brent crude around $100 a barrel, while other commodity prices have also risen. It added that the cost pressure has not yet been fully reflected in inflation data and survey indicators, and that the energy shock could still feed through transport, production, and services prices.

Deutsche Bank also said central banks may be reacting to inflation more aggressively than in the previous cycle. It noted that in 2022, major central banks did not begin large-scale rate hikes until inflation rose above 8%, while policymakers are now more sensitive to price risks after the last inflation shock. Fed Chair Kevin Warsh also acknowledged that U.S. inflation has remained above target for more than five years.

The bank said financial conditions remain relatively loose, with the S&P 500 near record highs and credit spreads still low. It added that if asset prices and financing conditions stay strong, central banks may need more rate hikes to curb demand and inflation.

Deutsche Bank cited history as showing that markets tend to underestimate rather than overestimate the size of rate-hike cycles. It said investors at the start of 2022 initially priced in only about 200 basis points of Fed hikes in the first year, but the actual increase ultimately exceeded 400 basis points.

The bank also said a deeper rate-hike cycle does not necessarily mean stocks must fall sharply. It pointed to 1999, when the Fed kept raising rates and U.S. Treasury yields climbed, yet the S&P 500 still rose nearly 20% for the year.