Tricky last mile(s)

In Short

Solid US growth, a decent earnings season and softer inflation measures are keeping global risk sentiment underpinned, with equities advancing in July. Yet the exceptional resilience of the US economy raises questions about whether inflation can quickly return to target.

Highlights:

 

  • Fresh US soft landing hopes have kept risk appetite underpinned, with central banks approaching peak rates and US disinflation on track.
  • Yet we sense rising market complacency. The last mile(s) towards inflation targets may indeed prove the trickiest. Either the US economy finally slows, or the Fed will need to bite further. The expansive US fiscal policy makes the job harder.
  • With valuations stretched and investors having re-built risk positions, a setback seems likely. We keep  prudent underweights in Equities and HY Credit, but like the carry in IG Credit and EM debt.
  • Yields are geared to the downside, if only moderately so. USD weakness is unfinished, but we tactically turn more prudent on EUR/USD.  
     

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Tricky last miles
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