Why equity and bond investors can expect better returns in 2023

What happens to US interest rates from here on is important to investors everywhere – through the influence they have on the US economy, on global rates and the dollar. There are reasons to believe we may be near the end of the interest rate cycle after the most aggressive “front-loading” of rate rises for many decades.

The US Federal Reserve has increased rates by 225 basis points since March. The suggestion is that there could be one or more moves to come but evidence is beginning to mount that the US economy is slowing. Markets are now pricing in that the Fed will be cutting rates by the end of 2023 in response to the US being in a recession. Indeed, official data suggests a recession may have already begun, with real gross domestic product growth being negative in both the first and second quarters.

Inflation data is key to the outlook. Consumer price inflation reached 9.1 per cent in June. This, of course, is a manifestation of the global cost-of-living crisis driven by higher food and energy prices. Even without monetary tightening, higher inflation was likely to slow global growth as consumer real income growth turns negative and businesses face higher costs and pressure on profit margins.