Robust Start to 2023

The global economy continues to show resilience as we pass the halfway point of the year. Structurally low unemployment, a strong jobs market and a high savings rate are fuelling continued growth in consumer spending. Tighter credit conditions have yet to bite across Europe and the United States despite one of the fastest paces of interest rate increases on record. In an effort to curtail the worst inflation in decades, Western developed central banks have moved aggressively to tighten monetary policy. This has helped exert downward pressure on inflation but has also brought about a meaningful slowdown in global growth and some financial accidents, including several US regional bank failures. Elevated inflation levels likely mean central banks will have to remain hawkish for longer, although there are signs that inflationary pressures are starting to ease. China is emerging from its Covid lockdown at a slower pace than expected but heading in the right direction, nonetheless.

Against this backdrop, equity markets continue to track their constructive outlook for 2023 and have already added +10% year-to-date. Fixed income is also benefitting as central bankers near the end of their rate hiking cycles and inflation expectations begin to moderate. US Treasuries have rallied +2% since January in euro terms while EU government bonds have added +3%. The US dollar may have topped for the year, in line with our expectations for the currency. The US dollar should continue to weaken in the months ahead as foreign exchange markets discount the increasingly challenging funding requirements facing the US government as they must finance record peacetime deficits in both their trade and budget accounts