In this report, we highlight how markets remain focused on a “Goldilocks” outcome rather than the bear(s):
Markets are pricing-in that a number of major central banks will continue to raise their policy rates over the next 6-months, and will then stop hiking or turn to cutting policy rates.
Bond investors are expecting these tighter monetary conditions to bring down inflation quickly in most advanced economies in 2023, especially the US. There is a good chance that inflation could be more “sticky” than markets are pricing-in.
Equity markets and lower-grade credit markets are also pricing-in that these tighter financial conditions, to bring inflation under control, will only lead to a small slowdown in GDP and earnings growth, again in the US especially. Over the next 12 months, we think the risks are more tilted to the downside.
