• Financial markets want it all this year – a soft landing, aggressive rate cuts by the Fed, and inflation tracking back to target. Aggressive rate cuts, particularly in H2 are more likely than a soft landing.  The Fed will soon have room to cut rates, but won’t be able to respond quickly enough to prevent a recession. 
  • US economists expect only 1.2% real GDP growth this year, so there is little room for error. However, a recession is only likely if financial conditions tighten more broadly. 
  • We remain cautiously positioned until we have clearer signs the US can avoid a recession. Either way this should be resolved by mid-year.  We prefer European and Japanese equities over the US and EM.  Australia is our least preferred region.  We recommend a slight overweight to sovereign bonds and global infrastructure.  Holding a small overweight in Australian cash also makes sense to us, given the RBA will not lead the global easing cycle.

Recession risks remain.

The balance of risks is tilted towards a global recession around the middle of this year even though momentum in the data is still consistent with a soft landing.

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