Speaker 0:
Back in October, we talked about the central banks, the need to fight against inflation and it was going to make recession more likely. Um And then at the start of this year, we detailed this idea that inflation was likely to moderate across many developed markets. Central banks were going to remain restrictive at these policy rates but uh uh a shallow recession a bit farther in the future,

Speaker 0:
uh maybe could you share some color around our analysis today and how the events of the first couple of months have impacted our outlook?

Speaker 1:
Yeah, so sure everything was actually looking quite good over the turn of the year, we saw much more resilient economic data. Um inflation was even looking a bit stickier, you know, but of course, things turned around very quickly. Um You know, we saw this uh banking sector stress that happened in in midchest step back, you know, given these events, we would just

Speaker 1:
highlight three things that we are really focused on or three themes about the outlook. You know, the first is that, you know, the banking sector stress has resulted in a higher risk of a deeper recession, maybe sooner. There's various academic studies that suggest when banks um perceive a higher cost of capital or cost of capital is rising, you know, then they actually pull back on their lending growth. Um And, and we do think we are seeing a rise in cost of capital in the banking sector,

Speaker 1:
you know, so all of that means that we are probably going to see lending growth slow um you know, and, and and slower lending growth um is just going to slow the economy. The second thing is is that inflation is still elevated. So central banks, they're going to be slower to ease than they have in the past going from 4 to 2. Again, it is going to take more time. And part of the reason for that, you know, is just labor markets are still very strong or at least they are coming into this period with relative strength and wage

Speaker 1:
inflation or the wage level adjustment has just taken longer to happen. Um And that's because, uh it's just less flexible than prices, you're gonna have wages that are continuing to catch up uh with the price level adjustment that we've had. And that's just gonna mean that wage inflation looks elevated for longer. That means that, you know, probably the Federal Reserve as a result of tighter credit conditions within banks, maybe they don't need to tighten as much because of this. But, you know, there might not be as fast or as aggressive

Speaker 1:
in terms of easing either. Um just because they're still having to deal with elevated inflation risks. Then in terms of actually starting that normalization path back to neutral, you know, in the past, uh we've said, you know, maybe that starts around the end of this year and the brunt of that happens in 2024. And I think that's still reasonable. Just on the third theme, you're gonna see that kind of behavior from governments as well. They're not gonna preemptively ease and we're not going to see the type of aggressive response like we did uh to the pandemic.

Speaker 1:
So the FDIC the fed, they still are able to invoke the so-called systemic risk exemption. When a bank does fail, they can come in um you know, expos and, and say we're gonna guarantee all the deposits, but in terms of a blanket provision ahead of time that would, um you know, probably help with confidence, which is so important in these kinds of events. You know, we just don't see that happening, you know, and further

Speaker 1:
more on the regulatory side, you know, that could actually tighten uh you know, in the coming quarters as a result of this.

Speaker 0:
Certainly a lot going on from the macro front. What's your advice for investors today?

Speaker 1:
Sure. Um You know, so I think lags with monetary policy, you know, they are working, the tighter financial conditions are becoming more apparent, you know, recession risks have elevated, but obviously this is a, you know, a good environment for bonds.