![]() ![]() Given the persistent underlying inflation, we do not share the market’s optimism that the world’s most important central bank, the US Federal Reserve, can afford to cut interest rates in the second half of this year. 2 It is also worth noting that central bank rates at current levels are not overly tight, if at all. Due to second-round effects such as wage increases, it takes longer for inflation to moderate once we have been in a high-inflation regime for an extended period, as academic insight and our own research shows. However, annualised core inflation (excluding highly volatile energy and food prices) has been hovering at around 4% to 5% for several quarters already – significantly above central banks’ targets of 2% (see Exhibit 1). True, headline inflation has moderated – thanks largely to a fall in energy prices. So, are we back in a “Goldilocks” environment that is supportive for all major asset markets, where the economy is running neither too hot or too cold? Not so fast: we think there are several challenges ahead of us and investors face a bumpy ride in the coming months: Bond yields have remained quite stable since early 2023, thereby generating a positive nominal return for investors. ![]() The last couple of months have also turned out to be a good period for investors: global equities, measured by the MSCI World, have returned around 10% adjusted for US inflation since last October (as at mid-June). This is not amazing, but it is still significantly better than feared during the winter. And global economic activity is hovering along at a rate of close to 2.5%, according to OECD 1 data. ![]() Since late 2021, global supply chains have very much normalised: the Federal Reserve Bank of New York’s Global Supply Chain Pressure index is now at one of the lowest readings in history – which should at least help to bring down goods price inflation, everything else being equal. Macro view: better than feared, but instability risks remain While we do not expect a smooth ride for the remainder of the year, investors may find good entry points.“ Stefan Hofrichter “We expect further rate hikes in the US and the European Central Bank will likely have to hike by more than currently priced by markets.
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