Most central banks are still raising interest rates while liquidity and the money supply are being cut back. At times, the stresses caused by monetary policy tightening is forcing some central banks to relax their policies temporarily. But the importance of such short-term countermeas-ures should not be overestimated.
Overall, tighter monetary policies are having an increasing impact on the consumer and the economy.
The fall in inflation rates is taking the pressure off from monetary authori-ties. The peak in the interest rate hike cycle is likely to be reached in the second half of the year.
Yields in the major government bond markets have been rather stable as of late. Volatility has fallen significantly.
Trends in stock markets are increasingly reminiscent of the Tech bubble of 1999/2000. We remain cautious in our positioning and neutrally weighted in the equity quota.
Currency markets have been broadly stable. The Swiss franc continues to be in demand.
Having risen earlier in the year, the gold price is now consolidating.

The troubled US regional banks and the emergency takeover of Credit Suisse by UBS unsettled market participants. The write-down of AT1 securities by CS led to a sharp decline in the price of the asset class.
It was only the loss of confidence that led to the distress of companies that were fundamentally soundly financed. Governments and central banks are endeavoring to restore confidence.
Negative effects on the still robust economy cannot be ruled out. Companies and consumers are threatening to become more cautious.
The monetary policy of the central banks is coming into even sharper focus.
Due to the uncertainties related to the U.S. banking sector, investors sought safe havens. These included the government bonds of the major economies, but also gold, which at times traded at over $2,000 per ounce.
The equity markets are proving resilient, but we remain cautious in our assessment and neutral in our equity allocation.
In FX markets, movements are relatively small despite stress in the financial system.

Central banks have been raising key interest rates to fight inflation and this will continue in the coming year. They will also reduce the size of their balance sheets.
We expect a dwindling growth momentum which will lead to recession in some countries. Ultimately, this will allow central banks to loosen monetary policy in a measured way in the second half of 2023.
Regarding the market outlook, one of the central questions is whether investor profit expectations for the coming year can be met or whether they will need to be revised downwards.
The inversion of the US yield curve points to a looming recession.
Equities have come under renewed pressure after central banks signal they have further tightening to do.
Regarding the market outlook, one of the central questions is whether investor profit expectations for the coming year can be met or whether they will need to be revised downwards.
The US dollar’s trend rise has come to a standstill and Gold has shown an impressive performance in recent weeks.

Central bank interest rate hikes will slow economic growth significantly in coming months.
While the world economy is still in decent shape, with labor markets robust, various sentiment indicators are becoming gloomier.
Russia’s territorial losses in eastern Ukraine increase the pressure on Vladimir Putin. Russia’s recently announced partial mobilization will undermine support within Russia for its war in Ukraine.
Sharp hikes in key interest rates and the process of central bank balance sheet reduction point to an economic slowdown. Central banks aim to bring current unacceptably high rates of inflation back to target levels around 2%.
Government bond yields continue to rise, and the US yield curve has become more inverted.
Equity markets are due for another reality check. Valuations have come down significantly, but earnings estimates for coming quarters are probably still too high.
The US dollar continues to trend higher. The euro, on the other hand, is suffering from the Eurozone’s multiple problems.
Gold has come under pressure due to higher yields and the strong US dollar.

While the probability of a recession is increasing we don’t think this will occur until at least next year.
Growth momentum continues to weaken, but only slightly. There are no signs as yet of any weakening in the labor market.
Inflation will remain well above central banks’ target levels for longer, becoming a burden for companies.
In the face of high inflation central banks are increasingly prioritizing their mandate of price stability and are raising key interest rates sharply.
The ECB is working on a new package to support peripheral Eurozone countries.
Interest rate hikes by the Fed and other central banks have made the bond markets nervous.
However, the likely rise in interest rates has now, in our opinion, been sufficiently priced into yield curves.
The mixture of high inflation, rising interest rates and a possible recession is a toxic environment for the stock markets.
The USD is performing inconsistently but gold remains resilient.

In view of the conflict in Ukraine we have reduced our estimate for global economic growth this year to 3.5%.
The tragic situation in Ukraine is weighing on markets and on the mood of investors. It is impossible to forecast with any confidence how the conflict might develop.
Assuredly, one consequence will be an additional surge in inflation, which will hit Europe in particular. Consumption and living standards will suffer.
Quarterly/annual corporate statements continue to be mostly encouraging. But inflation concerns are increasingly being highlighted.
The U.S. yield curve is now very flat, even inverted in some sections. Credit spreads on corporate bonds have widened significantly since the beginning of the year.
The stock markets are unsettled by interest rate fears and the war in Ukraine.
The US dollar and the Swiss franc act as "safe havens".
Commodity prices increased, in some cases significantly.

In 2022, economic growth is expected to slow slightly to around 3.9%.
The inflation problem will remain an issue in 2022. The high money growth rates of the last two years mean that the inflation potential is high, even if the central banks were to "tap" faster.
To break inflation expectations, the FED has announced it will "tapering" twice as fast, with the prospect of three rate hikes.
However, the FED will only be able to normalize its monetary policy tentatively. The financial markets will play a key role in determining the pace.
The USD yield curve implies a "policy error" by the FED. Investors assume that growth will come under pressure after a series of interest rate hikes and that policy will be reversed again in two to three years.
The stock markets are trending friendly, albeit with decreasing market breadth.
The gold price consolidates around the level of 1,800 US dollars.

We are sticking to our forecast for global economic growth of around 5.0% for this year. However, the growth rate has already passed its peak. For 2022, we expect growth of 4.0%.
China is also facing weakening economic growth. Moreover, there are problems in the real estate sector.
The Biden Administration is having difficulty finding Congressional majorities for its ambitious $3,500 billion spending package.
The Fed wants to start reducing (“tapering”) its bond-buying programs in November.
Federal Open Market Committee (FOMC) member interest rate forecasts (the “dot plots“) are consistent with one rate hike next year followed by three rate hikes in each of the following two years.
The September FOMC monetary policy meeting and the indication that the Fed will begin tapering bond purchases later this year had only a marginal impact on the US dollar yield curve.
The quiet sideways trend in the US dollar continues.

We expect the global economy to grow around 5.0% in 2021.
Ultra-expansionary monetary policy had little or no inflationary effect during the periods of lockdown because of the collapse in the velocity of money circulation that was induced by those lockdowns.
Now, with the reopening of the economy, consumers can again spend on services like travel and hotels. This will tend to increase the velocity of money circulation, increasing the risks of inflation.
The Fed has adjusted its expectations for inflation and started to discuss “tapering”. The Federal Open Market Committee now projects the first rate hike in the next interest rate cycle as early as 2023 (instead of 2024 previously).
Stock markets are experiencing abrupt shifts in sentiment but remain resilient.
The September FOMC monetary policy meeting and the indication that the Fed will begin tapering bond purchases later this year had only a marginal impact on the US dollar yield curve.
Precious metals prices have corrected sharply as real yields have picked up. More details on our assessments in the new Aquila Viewpoint.