Markets will have to adjust

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Interest Rate Outlook Eurozone, USA

After a major shake-out in December last year, financial markets staggered rather than slid into the new year. This was caused by fears over an imminent large economic downturn. It was difficult to discern a catalyst for these fears and they were by no means in keeping with economic data released in the US, which was the epicenter of the market turmoil. When the Fed stated that it didn't agree with the opinion of market participants and held out the prospect of further rate hikes, a panic ensued, at least in the short term. The safest assets – i.e., the highest rated government bonds – benefited the most from these developments. Is there anything to these fears? It is true that the environment is becoming more challenging. The most favorable phase, when households and above all companies enjoyed both low interest rates and strong economic growth, is over. However, that should not be a surprise to anyone, as it was always clear that the strong economic performance seen in 2017 and in the case of the US primarily in 2018 would not be sustainable. Economic growth rates were simply at levels in excess of long-term potential growth. The fact that interest rate hikes were used to gently counteract this wasn't exactly news either. A slowdown was inevitable. However, this is not tantamount to entering a recession or even the next crisis. Rather, a slowdown in growth is a relatively normal process. Financial markets will have to adjust to this new stage and can no longer blindly rely on low interest rates and a surfeit of excess liquidity.