Despite a rapid interest rate hiking cycle and an unprecedented decline in M2, the broadest money supply measure in the US, inflation has not fallen sufficiently. While certain areas in manufacturing are experiencing disinflation and commodity prices have come down, it seems that current monetary conditions are not restrictive enough.
In addition, the US labour market remains tight and while tech sector layoffs are making attention-grabbing headlines, the overall economy is still resilient. This is still leading to elevated nominal growth which supports earnings and risky assets. As a result, sentiment in the financial markets has improved. Market dips continue to be bought and credit spreads have eased from their March highs by 40 bps (EUR) and 30 bps (USD). Interest rate volatility has decreased, and a benign primary market issuance has left investors with ample cash to accommodate new deals and assume greater risk. However, we are maintaining a cautious outlook. Not only do the effects of financial tightening usually work with considerable time lags on the economy, but we also believe that the central banks acknowledge the necessity of a meaningful economic downturn to curb inflation.
