Economy

Financial markets were taken on a wild ride between Wednesday and Friday of this week, with hugely important monetary policy meetings in the US, euro area and UK along with a rash of economic data. Despite all the news, noise and market volatility, the underlying message for monetary policy and bond yields in the US, euro area and UK is unchanged.

The ECB and the BoE provided a comforting signal to markets that the end of the respective tightening campaigns is coming before the summer. In the process, they are closing their hawkishness gap relative to the Fed.

The US economy will experience a period of benign disinflation over the next few quarters. Beyond this goldilocks period, either the economy will slip into a mild recession in 2024, or more ominously, a second wave of inflation will prompt the Fed to slam on the brakes, leading to a deep recession.

Our bullish view on commodity prices is underpinned by demand growth driven by stronger real GDP, led by EM. Threats to this view – i.e., a failed re-opening in China, stronger USD, higher real rates in the US, and continued policy uncertainty – are non-trivial. All the same, we remain bullish industrial commodities and gold.

This US Bond Strategy Insight discusses what we learned from yesterday’s FOMC meeting and press conference, and discusses the implications of the market’s reaction.