Awaiting key central bank meetings

WHAT YOU NEED TO KNOW

Despite the market optimism since the start of the year, we are maintaining our slight risk-off stance in the near-term with a preference for higher quality assets with more defensive characteristics.
Central Banks reconvene this week with expectations that the Fed will likely return to a normal 25 bps hike, whereas both the ECB and the BoE are expected to lift rates by 50 bps.
Last week, US equities outperformed the euro area, which has been positive for portfolios given our preference for the quality US market. This has helped portfolios post positive returns this year, with our exposure to quality-oriented investments a further tailwind.

Markets

Positive market mood remains

Equities continue to outperform bonds in 2023. Most notably, US equities have outperformed the euro area last week, on more signs inflation is cooling, led by a resurgent technology sector.
Meanwhile, major currencies and government bonds have recently traded sideways, perhaps awaiting more clarity surrounding central bank intervention.

Central banks & inflation

Size matters

The Fed, the ECB and the BoE reconvene on Wednesday / Thursday. The Fed will likely return to a normal 25 bps hike, whereas both the ECB and the BoE are expected to lift rates by 50 bps.
The Fed further slowing the pace of hiking – and any change to forward guidance – will likely soothe markets. In contrast, the ECB’s 50 bps hike could be a source of concern as inflation looks like it has already marked a peak in October 2022.
The UK has not significantly moved past the inflation peak, but a 50 bps hike could nonetheless spook markets given recent evidence of a growth slowdown.
Overall, we expect central banks to stop raising interest rates in the coming months as efforts to slow inflation and the economy have been paying off.

Economy

A soft landing still on the cards

The recent upside surprises in US economic data make a soft landing in the US still possible.
Although it seems the euro area could dodge a deep recession given the milder winter experienced, we maintain a cautious view toward European equities due to what we believe remain unrealistic earnings expectations. In this regard, we keep a close eye on the ongoing earnings season in Europe.