As we reach the midpoint of 2023, it's worth revisiting the predictions we made earlier in the year. Specifically, our three key macro calls that would take place around Q2: a peak in inflation (starting with the US), a pivot in central bank interest rate policy (starting with the US Federal Reserve, Fed), and a pick-up in China's growth. We refer to these as “the three Ps”.
The macro rationale behind these calls was based on the expectation of a recession in developed markets due to monetary tightening, which would curb inflation and lead central banks to pause rate increases. Meanwhile, a recovery would gain momentum in China, where there is no inflation problem but, rather, central bank stimulus and reopening.
So, were our predictions right? Yes, partly. Inflation is showing clear signs of moving past the peak (in the US at least), leaving the door open for the Fed to pause its interest rate hiking cycle, and China’s growth has accelerated sooner -though perhaps less strongly - than expected and recent indicators point to slower progress. However, the prediction of a developed market recession has not yet come to fruition. Developed markets have proven to be more resilient than expected – the Eurozone and the UK in particular – thanks largely to energy disinflation and a mild winter, despite periods of weak growth. However, given the lagged impact of past interest rate hikes and the credit squeeze we envisage, a mild recession in the US now looks more likely in the second half of this year.
So, has our outlook changed as we look ahead to the rest of the year and beyond? Not a huge amount. We continue to believe we will see a divergence of growth and the emergence of new market cycles, driven by the so-called “three Ps”. We think the Eurozone and UK are probably where the US was six months ago, with inflation yet to peak convincingly and central banks looking to continue to raise rates – although not for long. Therefore, the balance of risks is skewed towards more European Central Bank and Bank of England hikes vs Fed.
We also think the currency outlook is unlikely to shift significantly over the next couple of quarters. We believe the US dollar (USD) remains overvalued and the Fed pausing rates could lead to some USD weakness. As the Fed pauses, the real interest rate differential between the US and the Eurozone/UK should diminish. The euro and pound sterling should strengthen vs the USD, though moderately given weak domestic growth.
When it comes to the market landscape, our overall stance is also largely unchanged. Relative to our long-term asset allocation, we still prefer allocating slightly more to high-quality bonds and slightly less to equities and credit, given market uncertainty and that we think the peak in interest rates is in sight. So, rather than an overhaul of our asset allocation, we’ll continue to make tweaks as trends and risks emerge.
Daniele Antonucci
Chief Economist & Macro Strategist
Henrik Drusebjerg
Head of Nordic Investment Strategy
Our three key macro calls that would take place around Q2: a peak in inflation (starting with the US), a pivot in central bank interest rate policy (starting with the US Federal Reserve, Fed), and a pick-up in China's growth. We refer to these as “the three Ps”.
a measured way to the evolving environment."
Investing puts your capital at risk.
Past performance is no guarantee of future results.
This document is designed as marketing material. This document has been composed by Quintet Private Bank (Europe) S.A., a public limited liability company (société anonyme) incorporated under the laws of the Grand Duchy of Luxembourg, registered with the Luxembourg trade and company register under number B 6.395 and having its registered office at 43, Boulevard Royal, L-2449 Luxembourg (“Quintet”). Quintet is supervised by the CSSF (Commission de Surveillance du Secteur Financier) and the ECB (European Central Bank).
This document is for information purposes only, does not constitute individual (investment) advice and investment decisions must not be based merely on this document. Whenever this document mentions a product, service or advice, it should be considered only as an indication or summary and cannot be seen as complete or fully accurate. All (investment) decisions based on this information are at your own expense and at your own risk. It is up to you to (have) assess(ed) whether the product or service is suitable for your situation. Quintet and its employees cannot be held liable for any loss or damage arising out of the use of (any part of) this document.
All copyrights and trademarks regarding this document are held by Quintet, unless expressly stated otherwise. You are not allowed to copy, duplicate in any form or redistribute or use in any way the contents of this document, completely or partially, without the prior explicit and written approval of Quintet. See the privacy notice on our website for how your personal data is used (https://group.quintet.com/en-gb/gdpr).
The contents of this document are based on publicly available information and/or sources which we deem trustworthy. Although reasonable care has been employed to publish data and information as truthfully and correctly as possible, we cannot accept any liability for the contents of this document.
Investing involves risks and the value of investments may go up or down. Past performance is no indication of future performance. Any projections and forecasts are based on a certain number of suppositions and assumptions concerning the current and future market conditions and there is no guarantee that the expected result will ultimately be achieved. Currency fluctuations may influence your returns.
The information included is subject to change and Quintet has no obligation after the date of publication of the text to update or inform the information accordingly.
Copyright © Quintet Private Bank (Europe) S.A. 2023. All rights reserved. Privacy Statement