A CHANGE OF SEASONS
That inflation may at last be cooling is good news for investors, but more evidence is needed for market sentiment to turn around.
The first signs of autumn are already in the air and the temperature feels even cooler than usual on the back of a record-breaking hot summer. Central banks have been working hard to take some of the heat out of the economy too this year as they seek to tame inflation, which has been quite high for a long time now. A series of interest rate rises appears to be having the intended effect, with US inflation looking like it has probably peaked.
Financial markets have been reacting positively to any data that suggests the economy is cooling. For the moment, bad news is good news. Investors are forward-looking and they are already thinking ahead. Of course, these trends are at an early stage and, given high volatility, we think it’s not yet the time to take directional views. While the rate hiking cycle has so far been fast, a slowing economy means central banks should be able to stop hiking rates at relatively low levels.
In the near term, a catalyst we’re watching is if central banks at least slow the pace of hiking. We’re not there yet and there are likely to be some bumps along the way – just as when the seasons change. This time, though, may be approaching. The right framework, at this stage, is to seek opportunities within asset classes rather than across them. For example, reducing exposure to euro area equites versus the US as the outlook in the former looks worse than in the latter.
Read the full publication
here.
Daniele Antonucci
Chief Economist & Macro Strategist
