Despite only being three months old, 2023 has already seen several macro narratives play out in markets. “Soft landing” optimism in January was followed by a “no landing” narrative in February which has given way to concerns about a banking crisis in March. There remain myriad ways in which these events could unfold, but our base case is that the pressure on some banks’ balance sheets prompts an even sharper slowdown in credit growth. That, combined with the delayed impact of earlier monetary tightening, would leave us more confident in our view that the US and most other advanced economies will soon enter recessions. Even if the resulting downward pressure on inflation provides a bit more fuel for the rally in government bonds and other “safe” assets, we think that this economic downturn will spell trouble for “risky” assets, which do not seem braced for a particularly poor growth outlook. We think that a sustained recovery in risky assets will have to wait until around the end of this year, once recoveries in the US and other developed markets (DMs) come into view.
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