The optimism on risk assets behaviour partly stems from most of the hiking cycle now being behind us and a better-than-previously-expected economic picture, mainly in the US. Here, we continue to expect a mild recession in 4Q23/1Q24, but we upgraded our 2023 growth forecast to 1.6% on the back of better Q1 growth revisions. The Eurozone should avoid a recession, but risks related to ECB overtightening and growth divergences among countries persist. For China, we downgraded 2023 growth forecasts to 5.1% due to a weak Q2 and delayed stimulus. Consequently, the following factors could drive economic considerations:

• Excessive optimism on shaky foundations. The strength in US growth is more mechanical and forward-looking indicators point to subdued activity. In Europe, risks are skewed to the downside, also because of the weakness in China.
• Watch out for core inflation regarding the policy path. Core disinflationary trends (and not a mild recession) could prompt the Fed to cut rates next year. But core inflation could still be sticky. Another factor to watch is real funds rates.
• Upward pressures on terminal rates. The ECB is not in a pause mode. Even for the Fed, we see pressures on our terminal rates forecast of 5.5%. However, financial stability concerns and financial conditions amid risks of overtightening must be monitored.
• Long-term shift from West to East remains. Despite China moving to lower growth, EM continue to present selective opportunities.

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