Overview Andrew McCaffery Global CIO, Asset Management Rates overshoot risks inflation bust Inflation has dogged markets this year and is likely to remain high, bringing an end to the era of easy money and increasing the risk that overtightening by central banks will trigger a sharp recession, an “inflation bust”. Markets want to believe that central banks will blink to be a wrecking ball for other economies, and change direction, negotiating the economy both in the developed world and for emerging towards a soft landing. But in our view, a hard countries that rely on hard currency debt. If the landing remains the most likely outcome in 2023. Fed continues to raise rates, an even stronger The previous norm of central bank “whatever it dollar could accelerate the onset of recession takes” intervention during the financial crisis and elsewhere. Conversely, a marked change in the pandemic is going or has gone. the dollar’s direction, potentially as its relative Until markets absorb this fully, we could see strength and confidence in monetary and fiscal sharp rallies on the back of expected action by policy making become an issue, could bring the Fed, only for them to reverse when it doesn’t broad relief, and increase overall liquidity across materialise in the way they expect. Rates should challenged economies. eventually plateau, but if inflation remains sticky Other parts of the world are on different above 2 per cent, they are unlikely to reduce trajectories. Japan has so far maintained looser quickly even if banks take other measures to policy settings; but any shift away from its current maintain liquidity and manage increasingly yield curve control could lead to unintended challenging debt piles. consequences for the yen and potentially add A key factor to watch is where the dollar goes another layer of risk to the already elevated from here. In 2022, the strong dollar has proved levels of volatility in FX markets. 4 Investment Outlook Fidelity International