We first penned this fixed income outlook at the very end of 2022, after a year characterised by inflation, aggressive central bank hiking and geopolitical turmoil.
We are not in the business of crystal balls but, as we peered into 2023, it was clear that the outlook for the year to come would hinge on inflation. Specifically, had it peaked? And, if so, when would central banks start slowing, pausing and ultimately reversing rate hikes.
As we explain in further detail below, our base case was that inflation probably had peaked, and that a pause in central bank tightening in the first half of the year would help usher in an economic recovery.
We also considered an alternative scenario. This hinged on the possibility that inflation could prove stickier than anticipated – in which case central banks would continue hiking rates for longer, increasing the probability of a global recession.
We are now several months into 2023. And if investors had been hoping for a boring year to offset the drama of 2022, recent events will have left them disappointed.
The collapse of Silicon Valley Bank (SVB) in March reverberated across markets, with concerns emerging over the impact on the broader financial sector and global monetary policy. Across the Atlantic, Credit Suisse’s troubles mounted. The Swiss regulator and central bank moved quickly and brokered a deal for Credit Suisse to be acquired by UBS.
Some of the challenges in the banking sector underscore the policy tightrope that central banks face: they must think as much about financial stability as inflation. But what does all of this mean for our outlook? Are our scenarios outdated? Has our stance changed?