Meanwhile, despite encouraging figures in the latest US inflation report, levels remain painfully elevated. These two trends pose a quandary for central banks and governments, as they pursue sometimes contradictory aims. In the United States, the economy is bowling along despite a clampdown in monetary and fiscal policy. While there are initial indicators showing tight financing conditions starting to bite, the labour market remains robust, and savings are sustaining demand. Underlying inflation is taking time to fall, giving the Federal Reserve ample reason to remain vigilant.
In Europe too, central banks persist in tightening policy against a more fragile economic background while governments heavily subsidise households and businesses to try and blunt the impact of the energy crisis. There are two risks here: that inflation may become embedded for the long term and that higher interest rates could make these measures unaffordable.
The UK grapples with the worst of both worlds: its labour market remains the only one amongst its developed counterparts whose employment participation rate has still not recovered to pre-pandemic levels, keeping pressure on wages. Some argue this is still due to Brexit reasons. On the other hand, consumers will feel the increasing squeeze of rising energy costs as winter approaches – an exogenous factor the Bank of England has little sway over. Meanwhile, investors are anxiously anticipating the delayed Chancellor’s Autumn budget as the government aims to reassure markets of their return to a sustainable fiscal policy.
Elsewhere, in China, growth is still likely being hampered by the zero-Covid policy and a struggling property market. Slower Chinese growth is taking its toll on the global economy but is simultaneously helping to bring down energy prices and so contributing to the opposing forces against the prevailing economic and price trends.
Continuing our prudent allocation strategy. We are maintaining our prudent approach to equity markets, retaining our underweight stance overall and continuing our path of reducing exposure to concentrated growth sectors. We have also continued a gradual re-allocation to Government Bonds as bond markets seem to have found a foothold at significantly more attractive yield levels than those of recent history, now providing reasonable income as well as increased levels of protection. We remain cautious about Corporate Debt and especially the riskier High Yield space as the unfolding recession could hold some surprises for the market yet.
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 11/11/2022, publication completion date.
