Risk assets have been in wait-and-see mode since summer’s end, but they are still pricing in a soft-landing scenario in which inflation continues to fall without any damage to economic growth. While we believe inflation will decelerate, the job of central banks is not done yet as they try to balance the ‘higher-for-longer’ mantra with economic growth. UST 10Y yields reached new highs for the past 15 years as markets maintained the view of no economic downturn. However, we think pressures on US consumption, Chinese growth and the real estate sector, and on Europe will challenge this Goldilocks scenario:

• Resilience of the US consumer, which represents 70% of GDP, is now giving way to weakness – The effect of tightening financial conditions, receding consumer savings and loosening labour markets will be bigger than the impact of any fiscal boost.
• The inflation trend will decelerate, but higher energy prices recently and costs of production ⎼ for instance, in Europe ⎼ could affect inflation expectations, which must be monitored.
• Policy difficulties – The last leg of inflation is harder to correct without a slowdown. We maintain our call for a mild US recession, starting in 1H24, and sluggish growth in Europe.
• China is key for global growth – China’s supportive policies do not change our view of slowing growth, which would affect other EM. However, countries such as India, Indonesia and Brazil are relatively shielded and should get a boost from domestic consumption.

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