Inflation continues to erode household purchasing power and rising interest rates are weighing on property markets and corporate investment. On top of which the UK, and Europe more widely, continues to feel the effects of the energy crisis. These headwinds, though, are still partly offset by support factors that limit the risk of an overly sharp slowdown. Household and company finances remain generally solid, with substantial savings and labour markets going from strength to strength. In the Eurozone, supportive fiscal measures have eased the impact of the energy crisis for companies and the hardest hit households. What is more, ongoing doubts around China's zero Covid policy have helped keep oil prices at moderate levels.
Central banks are watchful. Inflation looks to have peaked in the United States and Eurozone and is likely to fall off steeply in 2023 as the initial surge in energy and durable goods prices comes out of the comparison base. However, these base effects aside, core inflation may take time to follow suit as pressures feed through to salaries and service prices. Central banks will continue to tighten policy in the short term before calling a halt. They are likely to stick to their hawkish tone until they are sure that inflation has been brought back to near target for the long term.
We retain the broadly cautious tone of our investment strategy and our global equities Underweight. The tightening of central banks seems to have been largely taken on board by the bond markets, which now feature attractive interest rates, including in real terms. As yields of developed markets’ government debt have retracted from their October highs and stabilised at a more sustainable levels we have reduced our duration, taking advantage of attractive income at the shorter end of the curve.
We retain the broadly cautious tone of our investment strategy and our global equities Underweight.
In accordance with the regulations in force, we inform the reader that this document is qualified as a promotional document. Unless specified, all figures and statistics in this report are from Bloomberg and Macrobond on 02/12/2022, publication completion date.
