Latest fraudulent alert - last updated on Apr 2023. To find out more information and how to protect yourself, please click here.

Investment Institute
Macroeconomics

Risk Asymmetry

  • 08 January 2024 (10 min read)

  • Markets don’t budge on their aggressive pricing of the policy trajectory for the Fed and the ECB despite the absence of “lights flashing red” which would call for a quick reversal of the policy stance.
  • While a “soft landing “ is the baseline for the US and the Euro area when controlling for the difference in potential growth rates, the most plausible alternative scenario around this baseline is not the same in the two regions. 

While so far in the new year the equity market has not kept up with its pre-Christmas exuberant mood, forward contracts suggest investors still believe that the ECB and the Fed will deliver quick and massive accommodation in 2024. We maintain our more cautious approach. The minutes of the December FOMC meeting strengthen our view that Jay Powell’s very dovish statements on 13 December should be taken with more than a pinch of salt, while the labour market softening continues to proceed by minuscule increments in the US. In the Euro area, headline inflation has rebounded in December, as expected. At the current juncture no light is flashing red and forcing the Fed and the ECB to engage in cuts as early as March.

The fixed income market is resolutely positioned for a “soft landing” on both sides of the Atlantic and, when controlling for the difference in potential GDP growth between the US and the Euro area,  it is also our baseline. However, when it comes to risks around such baseline, we feel there is too little thought given by the market on the possibility of some significant transatlantic divergence this year. The most obvious alternative scenarios revolve around the two classical policy mistakes: central banks may already have gone too far and engineered a “proper recession”  which would ultimately take inflation below target. Conversely, they may have stopped their tightening too early making it impossible to bring inflation fully back to 2%. In our view, the Euro area is more at risk of falling in the first scenario, and the US in the second. Beyond the fact that the economy has recently been much more resilient in the US,  a fundamental difference between the US and the euro zone is that in the latter the maximum effect of the tightening of monetary conditions, given the usual transmission lags, will coincide with the start of budgetary restriction. The asymmetric materialisation of these alternative scenarios would be quite damaging to the euro exchange rate and make the policymakers’ choices even more delicate. 

Download full article
Download report (621.77 KB)

Related Articles

Macroeconomics

Remember “Trumpnomics”?

Macroeconomics

A Conversation about the Conversation

Macroeconomics

Pesky Data

    Disclaimer

    This website is published by AXA Investment Managers Asia Limited (“AXA IM HK”), an entity licensed by the Securities and Futures Commission of Hong Kong (“SFC”), for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy, sell or enter into any transactions in respect of any investments, products or services, and should not be considered as solicitation or investment, legal, tax or any other advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities under any applicable law or regulation. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation, investment knowledge or particular needs of any particular person and may be subject to change at any time without notice. Offering may be made only on the basis of the information disclosed in the relevant offering documents. Please consult independent financial or other professional advisers if you are unsure about any information contained herein.

    Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee such opinions, estimates and forecasts made will come to pass. Actual results of operations and achievements may differ materially. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Information herein may be obtained from sources believed to be reliable. AXA IM HK has reasonable belief that such information is accurate, complete and up-to-date. To the maximum extent permitted by law, AXA IM HK, its affiliates, directors, officers or employees take no responsibility for the data provided by third party, including the accuracy of such data. This material does not contain sufficient information to support an investment decision. References to companies (if any) are for illustrative purposes only and should not be viewed as investment recommendations or solicitations.

    All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and that past performance is no guarantee of future returns, investors may not get back the amount originally invested. Investors should not make any investment decision based on this material alone. 

    Some of the services listed on this Website may not be available for offer to retail investors.

    This Website has not been reviewed by the SFC. © 2023 AXA Investment Managers. All rights reserved.