In recent weeks evidence has mounted that the eurozone economy is proving resilient in the face of large shocks from higher energy prices and tighter financial conditions. After hitting a low of around 47 in October, the Eurozone Composite PMI climbed back to over 50 in January (see Figure 1), pointing to stagnation rather than outright contractions in activity. German industrial output, meanwhile, rose in November despite large falls in new orders during the month, reflecting the large order backlog built during the pandemic period. Impressively, the release of the preliminary German annual G ..read more

After enduring one of the worst years on record across asset classes, investors should find more cause for optimism in 2023, even as the global economy faces challenges. In our latest Cyclical Outlook, “Strained Markets, Strong Bonds,” we discuss how we are investing against a backdrop of a likely recession as central banks continue to battle inflation. This blog post summarizes our views over the next six to 12 months. The economic backdrop Economic activity has been more resilient than expected, but the outlook has deteriorated. Financial conditions have tightened, and our baseline view is f ..read more

The European Central Bank (ECB) raised its deposit facility rate by another 50 basis points (bp) to 2% at the December meeting, bringing its policy rate to the upper end of most estimates for a neutral configuration for the Euro area, namely 1.25% to 2%. The ECB made clear it expects to raise interest rates significantly into restrictive territory, aiming to ensure the timely return of inflation to its medium-term target of 2% – ­Euro area inflation has been running at about 10%. Indeed, the new Eurosystem staff macroeconomic projections foresee inflation above the ECB’s definition of price st ..read more

A slowdown in the pace of U.S. inflation in November reaffirms our view that the Federal Reserve will pause its rate-hike cycle in early 2023. The Labor Department said CPI (the U.S. Consumer Price Index) rose 7.1% in November year-over-year (y/y), better than the consensus estimates of 7.3%, and down from 7.7% in October. The long-awaited moderation in inflationary pressures across consumer goods categories should be relief for Fed officials, since it helps alleviate the risk of rising inflation expectations. Nevertheless, the underlying pace of inflation still looks inconsistent with the Fed ..read more

Investors who have already endured one of the most challenging years ever must now confront the question of how to invest when the U.S. and other major economies may be headed toward a recession. While financial market volatility is likely to persist, we believe the case for bonds is stronger than it has been in years, bolstered by significantly higher starting yields and bonds’ strong track record during economic downturns. Bond yields have risen sharply in 2022 as the U.S. Federal Reserve and other central banks have hiked interest rates in an effort to tame inflation. Historically, starting ..read more

With Republicans having taken the U.S. House of Representatives and Democrats retaining the Senate, it looks likely the next two years will feature legislative gridlock. Each party is on track for a razor thin majority in each chamber of Congress. This leads to another takeaway: The “red wave” that many pundits seemed sure of (although we had our doubts) never materialized and was instead replaced by a – choose your metaphor – “red rain drop,” “red ripple,” or “red whisper.” Indeed, Democrats may expand their majority in the Senate, depending on the outcome of the Georgia runoff race in early ..read more

October’s U.S. Consumer Price Index (CPI) inflation data was even softer than many observers had expected, with core inflation gaining just 0.3% month-over-month (m/m) versus consensus expectations of 0.5%. Pre-holiday retail discounting, a decline in used car prices, and a welcome easing in rental inflation were key drivers of the overall decline in CPI. While we would caution against calling a peak in U.S. inflation, as we suspect some of the categories that were particularly weak in October will temporarily re-accelerate in the months ahead, the October data was a welcome sign that the cent ..read more

Central banks across emerging markets (EM) have reacted to elevated inflation by significantly tightening monetary policy, in some cases well ahead of the U.S. Federal Reserve and the European Central Bank. Now, after a challenging period, EM inflation appears to be abating, with policy rates approaching previous cycle highs. This is lifting real, or inflation-adjusted, interest rates above neutral policy rates and toward prior peak levels, potentially creating a more favorable investing backdrop. After largely synchronized rate-hiking cycles across EM, monetary policies could once again begin ..read more

Upside inflation surprises prompted the U.S. Federal Reserve to hike its policy rate by 75 basis points (bps) for a historic fourth time. This brought the fed funds rate up to a 3.75%–4% range, meaningfully above the Fed’s 2.5% median long-run estimate, as elevated inflation continues to justify contractionary monetary policy. Despite continued upside inflation surprises, the Fed also altered the forward guidance in its November statement to emphasize the amount of tightening to date and the lags with which monetary policy impacts the economy. While the statement language left the door open to ..read more

Last month’s 20th National Congress of the Chinese Communist Party was the country’s most significant political event this year. It revealed China’s new leadership team for the next five years and laid out the government’s policy blueprint for long-term development. President Xi Jinping will continue into a third term while six other members of the Politburo Standing Committee, the country’s highest-level leadership body, appear to have close working relationships with him, presenting a united vision. As we expected, President Xi’s report to the Congress mainly focused on China’s long-term age ..read more