Highlights:

• Despite gains in economic confidence and inflation stickiness in Q1, bouts of banking stress have led the market to reprice the Fed path lower: a friendly combination for markets. Such a win-win situation will prove short-lived. 
• Central banks face the arduous task of juggling between their inflation targets and financial stability. This will be difficult, but we expect them to judge that financial conditions tend to lead the cycle, while inflation, and wages in particular, are lagging. The tightening cycle is either finished, or close to the end. 
• The only predictive certainty, following recent banking events, is that lending standards will continue to tighten. Already credit production is spluttering. This is not good news for growth; respect the lags, and the recession risk. 
• Known unknowns include the US debt ceiling negotiation, the so-far dormant EU bank-sovereign nexus, and US-China tensions. That said, 2023 is not 2008: rate-induced (unrealised) losses are less toxic than bad loans, policy makers have learnt the GFC lessons, the global consumer is still alive and investor positioning is already prudent. Still, we prefer cash, IG credit and core Govies to Equities, High Yield and peripheral bonds.
   

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