US Dollar

High rates have hurt real estate and, now, banks. The next shoes to drop: Loan growth, profits, and employment. Stay defensive. Recession is probable, but risk assets have not priced it in.

Stay defensive in the second quarter. We can see a narrow window for risky assets to outperform but we recommend investors stay wary amid high rates, supply risks, extreme uncertainty, peak polarization, and structurally rising geopolitical risk.

In this Strategy Outlook, we present the major investment themes and views we see playing out for the rest of 2023 and beyond.

It is a big mistake to think that rate cuts or lower bond yields will ease credit conditions. Quite the contrary. After an aggressive tightening of monetary policy, the first rate cuts always coincide with much tighter credit conditions. We discuss the implications for credit, government bonds and equities. Plus, we find a startling anomaly in equity sector performance.

This week’s report looks at the banking crisis within the context of shrinking dollar liquidity and implication for FX markets.

Bank failures are another ‘canary in the coal mine’ warning that a US recession is imminent, yet stocks, bonds, and the oil price are still a long way from fully pricing it.

In this report, we look at data releases over the last month and implications for currency markets.

The combination of collapsing energy inflation and cooling wage inflation means that euro area core inflation will slump later this year. We discuss the consequences.

Rather than teetering into recession, global growth has firmed since the start of the year. While we still expect inflation to decline, the risk that central banks will need to lift rates more than discounted has increased. Long-term focused investors should start raising cash allocations by trimming their equity holdings.

Since 1970, the track record of US housing recessions as the ‘canary in the coal mine’ for economic recessions is a perfect four out of four: 1974; 1980; 1990; and 2007. If this perfect track record continues, the current US housing recession presages an economic recession that starts in 2023. We discuss the investment implications.