Inflation is finally coming down, central banks are poised to cut rates, and credit spreads have withstood volatility in government bonds. So where do we see things going from here?
First we assess where we are in the cycle, with a focus on Fundamentals, Valuations, and Technicals; then we examine the credit themes we see playing out and set out our thoughts on a number of sectors that will likely drive our investment positions.
Executive summary
May and June saw the continuation of inflation finally beginning to come down in the US, the UK and Europe. This is expected to bring a dispersion in central bank action, with the European Central Bank making its first rate cut since 2019 in early June, taking the discount rate to 3.75%. The Bank of England is expected to follow suit but was unlikely to pull the trigger in the middle of a general election campaign.
Despite the better inflation news, the US Federal Reserve still estimates that it will only make one cut this year. At the start of the year the market expected the December Fed Funds rate to be sub-4% – that will no longer be the case.
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