However recent GDP prints confounded this and even more recent PMI numbers, stronger across the board, point to expansionary levels of activity. This has caused markets to rethink over-optimistic hopes for lower terminal rates with peak rate plateaus being short lived and the beginnings of acceptance that Central Banks might end up higher for longer causing volatility in risk assets as the ‘everything rally’ takes a breather. As mentioned before, Putin’s actions, whilst lowering overall levels of activity in the Eurozone, have not caused a recession and the durability of the US economy remains impressive.

Blow out jobs numbers gave everyone something to think about as non-farms printed at 517K and the latest inflation numbers were stronger than expected. To be fair to Jay Powell and other members of the FOMC, their language and guidance hasn’t changed from a hawkish stance and the idea of a potential pivot did not come from them. They delivered a smaller 25bp hike at their last meeting, which might have confused some, but look set to deliver the same at the March, May and June meetings which would be consistent with slowing the magnitude of hikes towards the terminal rate of 5.5% (priced by rates markets at below 5% at the beginning of February).

The ECB still has plenty of ground to make up having waited until after the middle of last year to even take their rates into positive territory. It is not a done deal that the area will escape a mild recession in the face of their hiking cycle but certainly the possibility is now much higher. The good news is that the European banking system is in a much better place than it was and profits are at their highest levels since 2007 therefore much better placed if a recession does materialise.

The UK remains the laggard in the G7 and our economy remains the only one smaller than pre Covid and the most likely to suffer recession. Brexit and all its associated inefficiencies mean that our imports have ballooned and our exports have collapsed. Inward investment remains way below historical levels. The Bank has to keep on going though as CPI still printing in double digits remains deeply uncomfortable. The Government have resisted wage demands until now but a wage spiral remains a danger (Tesco has just given its whole workforce a 7% rise).

Credit spreads have until recently been very stable trending sideways near recent tights. The return profile of Investment Grade remains at its most predictable for years and the primary market reflects this as some decent coupons continue to print for shorter dated paper (interestingly a recent dual tranche issue from Yorkshire Water was inverted). Overall issuance levels remain very high with $100bn of USD deals printing so far in February alone.

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