In June, the ECB delivered its eighth consecutive rate hike; policy rates rose by a cumulative 4% in less than a year. However, Eurozone core inflation remained sticky at 5.3%, indicating that the unprecedented tightening cycle only had a limited economic impact.

José Antonio Blanco, CIO 3rd Party Clients Switzerland, Swiss Life AM comments on the current state of the financial markets

The unemployment rate is at multi-decade lows and corporate earnings near record highs, not signalling an imminent recession, and therein lies the challenge. The ECB's primary objective is to maintain inflation around 2%, and it relies on rate hikes and quantitative tightening (QT) to achieve this. Both these tools, however, are quite blunt and have substantial lag effects on economic growth and inflation. This makes it difficult to engineer a soft landing. Further complicating the picture is the fact that inflation is a lagging economic indicator itself, often peaking in or just before a recession. Given these complexities, we perceive a high risk that central banks might overtighten monetary policy for an extended period, potentially missing the crucial signs of an economic downturn. Purchasing Managers’ Indices (PMI) and producer prices are already falling sharply, yet the ECB is likely to continue with its rate hikes and balance sheet reduction, possibly exacerbating the economic downturn down the line. Given this outlook, we remain cautious on credit risk and are moving to increase our duration, placing a bet on a decline in longer-term rates.

This may also be of interest to you

Research Reports

Emerging-3840x2160

Emerging Markets

Perspectives Emerging Markets Annual outlook 2024

21.12.2023

Research Reports

Finanzen-3840x2160

Financial Markets

Perspectives Financial Markets annual outlook 2024

21.12.2023

Research Reports

Konjunktur-3840x2160

Economics

Perspectives Economics annual outlook 2024

21.12.2023

Research Reports

Konjunktur-3840x2160

Economics

Perspectives Economics November/December 2023

09.11.2023