Articles by Chun Wang, CFA, PRM Director of Multi-Asset Strategies

Latest numbers are in line with expectations. There are several indicators that start to paint a more muddled picture on inflation going forward. The latest update of our inflation scorecard shows a Neutral reading of 50.

The rally in risky assets became even more broad-based, with small caps and EM participating fully.

The U.S. dollar broke below its recent support; its weakness has been a dominant driver of risky assets and its direction will be an important determinant of the current rally.

Latest numbers are below expectations. Various leading indicators point to softer CPI prints ahead. The prevailing soft-landing narrative underestimates the chances of inflation staying higher than what is acceptable to the Fed.

The risk rally has survived a wide range of challenges, including renewed central bank hawkishness, and tighter credit/bank-lending standards, among others. “Soft landing” is still the key narrative that supports the current rally.

So far, it’s all about sector exposure in 2023.

The latest pause is widely expected to be short-lived, but many things can happen to extend the pause or even completely end the tightening cycle. While some markets show little distinction between a final pause and an interim one, most behave in a way that’s consistent with the economic backdrop.

Despite an AI-fueled equity rally, an imminent liquidity reduction and ongoing bank-credit tightening are serious headwinds for risky assets in the near term.

Liquidity and lending conditions have tightened significantly over the course of the current tightening cycle, but they are likely to get worse before they get better.

Latest numbers support a Fed pause. We believe the 25 bps rate hike in May was the last one of the current tightening cycle. Our Scorecard suggests that the disinflationary force has the upper hand and the impact of credit tightening has yet to show up.

Despite the resilience in most risky assets, the recession probability has increased and the prospect of further credit tightening has only added to the downside risk.

An earlier-than-expected X-date means higher market volatility and increased chance of a temporary short-term deal. Typically, the debt ceiling drama is short-lived and there’s not much impact on most assets before or after a resolution. Overall, the possibility of an accident is now above average.

The Value/Growth dynamic seemed to indicate a return to the “lower rates are good for Growth stocks” regime. China reopening is still alive and well, despite a recent pause. The GSCI Industrial Metals/Gold ratio has broken below its recent range, which bodes ill for inflation expectations going forward.

Latest numbers are unlikely to impact the Fed’s upcoming rate hike decision in May. The China reopening theme is holding up but the inflationary impulse is still missing. Our Scorecard suggests that the disinflationary force is getting a bit stronger, but the overall inflation picture remains quite muddled.

Inflation concerns have been pushed aside by the upcoming curtailment of credit and lending. The possibility of a recession has no doubt increased, and risky assets are apt to face challenges.

We studied market behavior around yield curve re-steepening and identified six historical cases. Of those, three were successful and preceded major recessions. The other three instances failed and reversed to new lows. The gist of the study: We are at a critical crossroads.

The MOVE index, a volatility gauge for the bond market, has become a far better risk barometer—and it surged to a new cycle high in March.

Inflation worries have rekindled expectations for additional rate hikes. Providing this dynamic is still in play, risky assets are apt to face challenges.

While the valuation gap between Growth and Value sectors was compelling just a couple of years ago, it has closed drastically the last twelve months. Our analysis shows that Value sectors (Energy, Industrials) are still more favorable than Growth sectors (IT, Health Care).

The China-reopening theme is alive and well, which will likely support cyclical outperformance. The disinflation trade is at a crossroads. Value/Growth started to decouple from interest rates.