Deciphering Central Banks’ Stance Amidst Stagflation in 2023
By
👤DWS
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As we journey into 2023, the global macroeconomic landscape exhibits marked differences from prior years. A decade of easy monetary policy, enabled by low and stable inflation, gave way to 2022's unprecedented monetary tightening, as central banks raised interest rates and gradually decreased balance sheet holdings. This tightening, coupled with economic uncertainty, has burdened financial assets. Despite the resilience of current real economic data, anticipated demand destruction darkens the near-term corporate profitability outlook.
Market Repricing and the Challenge of Valuation
On a nominal basis, the repricing across fixed income and equity markets has made valuations less daunting compared to historical norms. Sovereign bond yields in some developed economies are now substantially higher than a year ago. Inflation-linked securities now offer positive real interest rates, with the real yield on a 10-year Treasury Inflation Protection Security surpassing 1.5 percent for the first time since 2010. Despite inflation persistently exceeding its targets, the market's pricing of Fed Funds rate hikes has slowed.
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By
👤DWS
