Page 7 - ISQ Outlook 2023

INVESTMENT STRATEGY QUARTERLY

When Will Global Central Banks Change Direction?

Relative to other major central banks, The Fed has been one of the most aggressive in the 2022 tightening cycle.

YTD : +200bp
Current Rate: 2.00%
YTD : +225bp
YTD : +400bp YTD : +275bp
Current Rate: 4.25% Current Rate: 3.00% Current Rate: 3.25%

YTD : 0 bp
Current Rate: - 0.10%

YTD : +375bp
Current Rate: 4.00% YTD : -150bp
Current Rate: -0.15%

YTD : 300 bp
Source: FactSet, as of 15/12/2022 >3 2-3 0-2 <2 Current Rate: 3.10%

The global central banks most likely to pivot soonest are the the U.K. pensions industry in late September). But these are
Bank of Canada and the Reserve Bank of Australia, where risks to the base case and do not form a core part of the
inflationary pressure is expected to fall relatively sharply, and outlook.
earlier policy tightening weighed more heavily on domestic
economies. The Bank of Japan has adjusted the parameters of WHAT DOES THIS MEAN FOR FINANCIAL MARKETS?
its bond purchases, but remains committed to its long- Despite the subdued outlook for the global economy, pros-
standing programme. The risks, both to the domestic economy pects for financial assets look brighter than they did heading
and the global financial system more widely, associated with into 2022. Developed economy sovereign bond markets are
stepping away are so profound that a major change in the expected to rally as 2023 progresses, inflationary pressures
policy stance is unlikely. fade and central banks slowly transition to an easier policy
stance. This trend is expected to be most apparent in Canada,
THE RECOVERY WILL BE RAPID Australia and New Zealand, where yields are expected to
The economic recovery across developed economies, although decline comparatively sharply.
slow to start, will be relatively rapid and gather momentum
into 2024. Typically, recoveries tend to be more protracted in In contrast, government bond yields in the eurozone, whilst
the wake of a downturn induced by a financial crisis, periods likely to end 2023 lower than they began the year, will face the
during which credit creation is subdued. Although not to be twin headwinds created by persistent residual underlying
taken lightly, current levels of financial and household sector inflation and a regional central bank further behind in the
leverage across developed economies are lower now than they policy tightening cycle than its developed economy peers. On
were ahead of the financial crisis period. This is not to say that the flip side, the establishment of an “anti-fragmentation”
the eventual recovery is cast in stone. The eurozone recovery policy instrument, allowing for targeted intervention where
could prove protracted were the region’s energy crisis to persist necessary, should limit the scope for peripheral yield spreads
or leave a deeper scar. More widely, the aggressive pace of to widen or markets to become disorderly. The outlook for U.K.
monetary policy thus far undertaken could serve to expose gilt-edged securities has improved following a return to fiscal
fragilities in the financial system (akin to the problems faced by policy orthodoxy after an unwelcome interlude earlier in the

7