The year started with an almost unanimous forecast that major developed economies were staring at a full-blown recession, led by the US and Europe. This doesn't quite seem likely anymore. IMF recently upgraded its US annual growth forecast from 1.4% y-o-y (January economic outlook) to 1.8% in July and Euro area growth from 0.7% to 0.9% for 2023.
More granular gauges — from US retail sales to Britain's wage growth — continue to surprise on the upside. Markets have now dumped the recession idea in the West to forecasting a 'soft landing' — a slowdown in growth but not an economic contraction that a recession entails. Forecasters seem to have underestimated the resilience of consumer spending and job markets, even in the face of hefty interest rate hikes by central banks.
If you had asked the average fund manager or economist in January where the money was to be made this year, the answer would have been — 'the bond market'. Impending recession and falling inflation would eat into companies' sales, pricing power and profits, making stock markets a 'no-no'. As inflation fell, central banks would start cutting interest rates.
If you remembered the simple rule that bond prices vary inversely with interest rates — bond prices go up as interest rates go down — buying bonds was the proverbial no-brainer. No joy with this forecast either! The pace of moderation in inflation has been disappointing. For instance, core inflation (excluding food and fuel) is what central bankers tend to fret about the most.
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