Postponed is not abandoned
Macroeconomic update for July 2023
We have previously pointed to the remarkable resilience of the US labor market and the strong consumer as having provided the economy with a boost. That support means the long-awaited recession has been delayed — but not averted. Various leading indicators, such as the inverted yield curve, strict lending standards and the lack of economic support from Europe or China leads us to expect the recession towards year-end. Inflation is set to continue its downward trend, while the US Federal Reserve — given the current absence of a recession — is likely to focus on its inflation battle before pivoting to rate cuts in the first quarter of 2024.
Given this environment, we feel confident with our current portfolio positioning, meaning we refrained from making any changes. We went overweight on equities at the end of September and believe this is still warranted, especially considering our nine-month horizon and the prospect of a Fed pivot.
The monthly CIO update analyzes the current market environment and delves into the economic backdrop. Mario Montagnani, Senior Investment Strategist at Vontobel Multi Asset, and Michaela Huber, Cross-Asset Strategist, discuss the trends.
Key Takeaways
- The US recession is coming — but with a delay
A powerful cocktail of a strong consumer and a resilient labor market have propped up the economy so far. Nevertheless, all leading indicators are pointing to a recession. - Inflation is poised to continue its retreat
We do not see inflation flaring up in the second half of the year. Global growth remains too weak, and there is no strong fiscal impulse in sight. - Awaiting the Fed’s pivot
The Fed is now likely to take its foot off the gas pedal later than we anticipated. The delayed recession means the Fed can focus entirely on fighting inflation.
