Waiting for the Pause
Recent data show a slightly less positive trend in economic activity in the United States, the Euro area, and also in China, whose post-Covid recovery remains modest. Only the United Kingdom is outperforming expectations, defying previous forecasts for a recession for the time being. Developed economies will continue to be underpinned by healthy labour markets and still plentiful household and corporate savings, which will continue to mitigate the impacts of inflation and monetary clampdown. Markets are now pricing in a forthcoming pause by central banks, notably for the US Federal Reserve. Headline inflation has continued to come down rapidly in most economies, in line with producer prices, but core inflation is proving more stubborn against a backdrop of still-solid labour markets. Monetary policy tightening now seems to be nearing its end as central banks look ready to pause in the US and the Eurozone, but they will likely keep rates high until they see clear evidence that underlying inflation is easing.
In the UK, red-hot wage growth figures forestalled further easing in wider cost pressures. Headline inflation remained at 8.7%, unchanged from the month prior, and core inflation even accelerated to 7.1% from 6.8% in April. Subsequently, the Bank of England resolutely responded with an unexpected 50 bps interest rate hike, and markets are now pricing a peak at just above 6%.
We remain comfortable with a neutral equity allocation given the positive momentum of markets. Within our equity exposure, we still favour UK and European stocks, which continue to ride a stronger nominal earnings trend and trade on cheaper multiples. We also continue to hold diversifiers such as high-grade government and corporate bonds, gold, and hedge funds to manage volatility and risk.
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 16/06/2023, publication completion date.