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Risk premia erosion

In Short

Confidence is growing that the Fed will manage a soft landing of the US economy. We now expect a shallower slowdown over mid-year and have raised our 2024 forecast to an above-consensus 2.1% as the boost from continued disinflation and solid wage growth will largely offset the drag on consumption from depleted excess savings.

Highlights:

  • “Immaculate disinflation” is getting increasingly consensual and brightening the 2024 market outlook, leading to a further erosion in risk premia. 
  • We expect a bumpier road near term. Rate cut expectations are flattening out. 2H23 US economic strength has likely caused complacency about actual risks, helping risk assets to perform positively again in January even as long-term yields backed up a bit. 
  • Stagflationary geopolitical risks in the Middle East may challenge then increasingly consensual Goldilocks (continued disinflation, resilient growth). Even with a soft landing more likely, we see limited value in extending risk taking right now – we prefer safer (IG) buckets in Fixed Income and tactically raise Cash exposure. 

     

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