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Given the European Central Bank’s (ECB) hawkish tone in recent weeks, all eyes will be on the euro area preliminary inflation print for February in the hope that it shows signs of easing price pressures. Regardless of the outcome, we expect the ECB to deliver another 50 bps increase in March as underlying inflation remains far above the 2% target. On the other side of the Atlantic, the minutes of the Fed’s February meeting confirmed that US policymakers are not ready to relent in their fight against inflation either.
Despite the optimism in recent weeks, markets seem to have now largely accepted that the possibility of sizeable rate cuts from the Fed in 2023 is unlikely. This was driven somewhat by the better-than-expected flash PMI (Purchasing Managers Index) surveys for February last which markets reacted strongly to (bond yields jumped and equities sold off). The surveys showed the US Composite PMI has now crossed the 50-threshold to move into expansion after 8 months in contraction.
We’ll be keeping a close eye on this week’s Chinese PMI data for confirmation that the economic recovery is gathering steam – one of the key views in our 2023 Outlook. High-frequency mobility data suggests that life is gradually returning to normal in Chinese cities, and we expect China to provide a significant impulse to global growth in the coming months.
With China expected to buck the weak growth trend, things aren’t looking as promising for the German economy, which shrank more than initially estimated in the fourth quarter of 2022. Germany is now facing the possibility of a recession, though activity data from the first two months of the year give hope that any contraction may be shallow. It’s a similar story in the UK. While it technically avoided recession with 0% growth in the final quarter of 2022, it’s not out of the woods yet and is still at risk of dipping into recession this year.
We’re still confident in our 2023 Outlook view that inflation will continue to moderate over the year, while growth should slow as the effects of policy tightening filter through to the economy. In this scenario, we believe that high-quality bonds offer attractive returns for a comparatively lower risk level.
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