Optimism was definitely behind the respectable performance registered by risky assets in the last quarter. However, the economic backdrop does not look overly positive. On the price levels side, US headline inflation is receding, although the core measure - more important for monetary policy decisions - is proving to be stickier. The latest European and UK inflation numbers signal that price growth is cooling.
- Central banks (CB) are possibly winning the battle against inflation, however, what we need to gauge carefully is the extent to which the economy was damaged by restrictive policies. On the growth side, our estimates are pointing towards a mild recession in the US and a slowdown in Europe, mainly driven by tight financial conditions and an unexpectedly weak Chinese stimulus, which the Old Continent economy is linked to.
- We foresee a vigilant Fed in the short-term: rate cuts are possible only if core disinflationary trends materialise. Emerging market (EM) economies are out of sync with developed markets. In fact, CBs in this part of the world are on a more neutral, if not dovish, stance.
- Our long-term model assumptions are characterised by a disorderly energy transition that integrates secular trends and uncertainty, both affecting price dynamics and volatility. Interest rates will normalise in the long-run on upward sloping, albeit flatter, curves.
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