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Overview & Performance

At the start of the year, there was no shortage of market experts forecasting an economic recession due to the lagging effects of the Federal Reserve’s now ongoing 15-month rate hike cycle. Fears of a potential credit crunch climaxed in the March bank turmoil when four US banks and one European bank folded. The ensuing rates volatility reached extreme levels never seen outside of the Great Financial Crisis of 2008.

Policy makers across the globe are adamant to tame inflation back to the 2% target level. US inflation is softening, but the Fed’s preferred measure, core PCE, has remained above 5%. The Fed paused rate hikes at the June meeting, and policymakers then forecasted two additional rate hikes this year. The threat of additional rate hikes previously led to a decline in asset prices throughout 2022, but year-to-date asset prices have been steadfast.

Economic data has been coming in stronger than expected. US Q1 GDP was revised notably higher to 2% from 1.3%. Consumer confidence increased to its highest level since the start of 2022 and the unemployment rate remains near generational lows.

Markets are seemingly pricing in a more optimistic economic outlook. Record index performance, improving market breadth, resilient economic data, softening inflation, and an AI revolution may suggest that one of the most widely anticipated recessions may not be in the cards this year after all. The deepest US Treasury yield curve inversion since 1981, a reliable recession signal, suggest otherwise.

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About the Author

Dawid Balt
Branch Manager & Portfolio Manager, Sasfin Wealth

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