The June quarter was one for the record books – the lowest Australian unemployment rate since 1974 and the highest US inflation rate since 1981 – all while markets shifted from pricing inflation risks to pricing recession risks, against a complicated backdrop including the threat of an escalating war on Europe’s doorstep, increased supply challenges caused by both the Russia / Ukraine conflict and COVID lockdowns in China, and concerns regarding energy and food shortages globally as the price of both skyrocketed.
Looking ahead, and with interest rates still well below ‘neutral’ levels, the combination of already weakening economic data and stubbornly high inflation presents a conundrum for central banks. Tighten too far, and they risk causing a recession, while a ‘soft touch’ on rates risks embedding inflationary expectations, ultimately leading to even higher rates than would otherwise be necessary; all suggesting that a short and sharp rate hiking cycle remains the most likely outcome. With most global economies (apart from Europe) entering this tightening phase from a position of relative economic strength, with full employment, strong corporate balance sheets, high household savings rates and strong equity and property prices, a ‘soft landing’ from here is still a possibility, but until more clarity emerges, markets are likely to remain on edge, with higher than usual volatility persisting.
For a more detailed update, Clients can refer to your Quarterly Update Report.