Overview:

  • The game has changed for both the Fed and the RBA. After 18 months of slowing inflation and low unemployment, the disinflation process has stalled. Easing for both central banks is off the agenda for now, but so too is a return to tightening.

  • This creates a difficult backdrop for asset allocators. The bond market will lack direction until there is clarity about the next move in rates, but the structural backdrop for US earnings remains positive and there is confidence US growth will remain resilient.

  • We think it is best to play stronger for longer US growth via the cyclical markets such as Europe and Japan. Both markets have leverage to US growth, but on better valuation.

  • The Fed has arguably a more difficult bath to navigate than the RBA because the economy is relatively stronger. Provided it remains convinced there is no need to move back to a tightening bias, markets can adjust to a policy backdrop where rates are higher for longer without causing much pain. The remainder of 2024 won’t be a repeat of 2022 unless inflation becomes unhinged.

Patience and Virtue: What to do When Markets Lack Direction

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