The markets are in the early stages of pricing in stagflation. Here’s what happens next.

Citi’s quant team says markets are beginning to price in stagflation: equities and bonds are showing simultaneous underperformance while commodities have yet to act reliably as a hedge. Using a 22‑day rolling correlation, strategists see a shift from a benign recovery regime toward an inflation‑boom / tighter‑financial‑conditions regime that typically precedes stagflation. In that environment energy (XLE) tends to outperform while financials (XLF) and industrials (XLI) lag; trend/momentum and quality factors also do relatively well. Gold (XAUUSD) has not behaved like a classic stagflation hedge recently and has moved more in line with risk assets. Market impacts highlighted include repricing in energy, rising crude, and potential gradual stock-market weakness as tightening continues — signalling investors may favor energy and selective factor exposures while monitoring bond and equity correlations as early warning signs.